Financial Reporting

May 1, 2011

  The AICPA’s Financial Reporting Executive Committee (FinREC) released a working draft of the revised practice aid Valuation of Privately Held Company Equity Securities Issued as Compensation, also known as the “Cheap Stock” practice aid. It is an update of the practice aid originally issued in April 2004. The working draft is open for comments until May 31 at tinyurl.com/4lso7ua. All comments will be kept confidential and will not be posted on the AICPA website.

 

The practice aid provides nonauthoritative guidance and illustrations for valuation specialists, preparers, auditors and others regarding valuation and disclosures related to privately held company equity securities issued as compensation. Subsequent to the publication of the original practice aid, FASB issued several accounting standards that introduced key changes relating to valuation practices for early stage companies. Furthermore, since 2004 there have been advances in the theory and practice of valuation for early stage companies, and the broad usage of the practice aid has also revealed topics that the original practice aid did not cover or that were not completely clear.

 

The accounting and valuation guidance included in the revised practice aid has undergone significant revisions. From the accounting perspective, the revised document, among other things:

 

  • Addresses the interaction between FASB Statement no. 123(R), Share-Based Payment (revised 2004), and FASB Statement no. 157, Fair Value
  • Measurements . The revised practice aid recommends following the measurement guidance in FASB Statement no. 157 (incorporated in FASB Accounting Standards Codification (ASC) Topic 820) when accounting for share-based payment transactions unless such guidance is inconsistent with the guidance in ASC Topic 718 or 505-50.
  • Includes the updated example of financial statement and management’s discussion and analysis (MD&A) disclosures, which reflects the latest GAAP and SEC requirements.
  • Provides the latest views on contemporaneous versus retrospective valuations and related disclosures. The revised practice aid eliminates suggested disclosure differences when a contemporaneous versus retrospective valuation was performed. As a result, recommended disclosures will now be the same regardless of whether a company obtained a contemporaneous or retrospective valuation.

 

From the valuation perspective, the revised practice aid has been updated to describe some of the “best practices” that have evolved in recent years. The revised practice aid, among other things:

 

  • Addresses the “backsolve” method.
  • Clarifies the probability-weighted expected return method (PWERM) and the option-pricing method (OPM) and provides additional examples.
  • Includes a newly added discussion of the backsolve method for PWERM and OPM.
  • Introduces hybrid methodologies, which combine PWERM and OPM, and provides examples.
  • Addresses control and marketability issues related to premiums and discounts.
  • Discusses determining the fair value of debt for purposes of valuing equity.
  • Reflects updates for AICPA Statement on Standards for Valuation Services no. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset.
  • Includes updated and new statistical material and other references.

 

  The SEC adopted the 2011 U.S. GAAP Financial Reporting Taxonomy, which is used for creating and submitting tagged interactive data files in extensible business reporting language (XBRL), the Financial Accounting Foundation (FAF) said in a press release. The taxonomy contains updates for accounting standards and other improvements to the official taxonomy previously used by SEC issuers.

 

The complete taxonomy is available at tinyurl.com/47rwxmk.

 

FAF, the parent organization of FASB and GASB, is responsible for the ongoing maintenance of the taxonomy applicable to public issuers registered with the SEC. FAF said questions about using this taxonomy for creating and submitting XBRL-tagged interactive data files in compliance with SEC rules should be directed to the SEC. Contact details and guidance are available at the SEC’s XBRL portal, xbrl.sec.gov.

 

The taxonomy is a list of computer-readable tags in XBRL that allows companies to tag precisely the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for, assemble and process data so it can be readily accessed and analyzed by users of financial statements.

 

The 2009 taxonomy currently used by SEC issuers was developed by XBRL US Inc., an independent nonprofit organization. FASB staff provided technical accounting standards support to XBRL US during the development of the 2009 taxonomy. In early 2010, FAF assumed maintenance responsibilities for the taxonomy, and, along with FASB, assembled a team of technical staff dedicated to updating the taxonomy for changes in U.S. GAAP, identifying best practices in taxonomy extensions, and developing technical enhancements.

 

An archived, one-hour audio webcast hosted by FASB, covering what public company financial report preparers need to know about using the taxonomy, is available at tinyurl.com/64cm2wm.

 

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