Summary of FAS 123(R) Valuation and Accounting for
Relative TSR Plans

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A performance award based on Relative TSR is considered a market condition under FAS 123(R) since vesting is contingent on share price appreciation. Therefore, the effect of the market condition should be reflected in the grant date fair value of the award. The most common technique used to value this complex instrument is Monte Carlo simulation.

A Monte Carlo simulation model projects future stock prices for the granting company and its peers based upon a risk-neutral stock price framework. In order to capture the complex nature of future stock prices movements the correlation between stock price movements of each member of the peer group must also be reflected in the simulation model. The simulated future stock prices are not only used to determine the relative rank at the end of the performance period and the expected number of awards to vest, but further should be used to determine the fair value as the grant date present value of future cash flows. Read more about FAS 123(R) valuation of Relative TSR plans.

Since the fair value will consider the probability of attaining the underlying market condition, a company shall not reverse any previously recognized compensation expense solely for not meeting the market condition. However, if the company also has an underlying service condition (generally common), and an employee does not meet the requisite service condition, a company shall reverse previously recognized compensation expense for the award.

Estimate the fair value of your Relative TSR plan here - Coming soon!

Further questions about the valuation and accounting of Relative TSR plans can be directed to Jim Lecher at jlecher@radford.com.