* Setting up a record-keeping system for these securities that is tied to the record-keeping system for existing options (recall the value of the ESOARS is tied to the vesting and exercise behavior of the underlying options).
As the underlying options are exercised, the issuer then will have to make payments to the holders of the ESOARS, which will involve additional transaction costs.
An assessment of these costs needs to take into account that the ESOARS in this auction represented 10% of the total number of employee stock options.
Zions' Hill also notes that the first auction included "excessive legal costs." He estimates legal costs for an ESOARS auction could be as low as $20,000 for smaller companies ($350 million to $750 million in market capitalization) and as much as $100,000 to $200,000 for larger companies ($2 billion to $20 billion market cap).
Hill counters these concerns by pointing out that an ESOARS auction "sells securities in an open auction that the company has to accept."
The SEC in its letter to Zions concluded that "the ESOARS instrument is sufficiently designed to be used as a market-based approach to valuing employee share-based awards under Statement 123(R)." The SEC also recommended that "each ESOARS auction be analyzed to determine whether it results in an appropriate market-pricing mechanism.
* The size of the ESOARS offering relative to market demand.
The letter implies that not all ESOARS will qualify, Who will make this determination?
Similarly, how will the use of ESOARS affect comparability?
Zions Bancorporation has broken innovative ground with ESOARS. The SEC letter makes it likely, but not certain, that these securities can be used to determine the cost of employee stock options, and it is likely the cost established by these auctions will be lower than that established by option-pricing models.
The SEC's Office of the Chief Accountant and Zions are still hashing out the proper accounting treatment for ESOARS. Consequently' it may differ from that discussed below, but the framework should be similar.
If the ESOARS are classified as a liability, the company would credit the proceeds to a liability account, and under Accounting Principles Board Opinion no.