However, "the floodgates are not opening," observes Trenwith's Stryker; "I don't see much movement toward the binomial method." Trenwith, an affiliate of BDO Seidman, provides the audit firm with valuation guidance, mainly for midsize corporations. Moving to the binomial method is "fine," he maintains, quickly adding that "from a cash-flow perspective it doesn't matter what methodology companies use. Recognition of the expense doesn't change cash flow."
Every vendor has its own take on the binomial method, says Adamson, and companies and their auditors are still looking for their comfort zone. Another factor that companies should consider carefully, he says, is that once a company goes binomial, its auditor generally won't allow the company to reverse course. For CFOs who might someday find themselves longing for the simple days of Black-Scholes, some further thought might be in order.
| Going Binomial Companies of all sizes seem equally likely to make the switch from the Black-Scholes to the binomial model. |
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| Year | Small (Less than $100m)* |
Medium ($100m-$1b)* |
Large ($1b-$5b)* |
Jumbo (More than $5b)* |
Total |
| 1995 | 5 | 7 | 3 | 1 | 16 |
| 1996 | 0 | 1 | 1 | 0 | 2 |
| 1997 | 0 | 0 | 0 | 0 | 0 |
| 1998 | 1 | 0 | 0 | 0 | 1 |
| 1999 | 0 | 1 | 1 | 1 | 3 |
| 2000 | 0 | 3 | 0 | 0 | 3 |
| 2001 | 1 | 0 | 1 | 1 | 3 |
| 2002 | 2 | 3 | 1 | 0 | 6 |
| 2003 | 1 | 4 | 0 | 3 | 8 |
| 2004 | 7 | 4 | 6 | 9 | 26 |
| 2005 | 37 | 44 | 26 | 27 | 134 |
| 2006 | 18 | 25 | 40 | 23 | 106 |
| Total | 72 | 92 | 79 | 65 | 308 |
| *Annual revenue Source: Aon Consulting |
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Reader CommentsDisplaying 1 of 1
James ONeill
May 22, 2006 12:03 PM ET
12:01 P.M.
The article was quite informative and useful in my continued evaluation of the two valuation methods for my employer. … more
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