Private companies that issue equity-classified share-based awards will be able to elect a practical expedient and use the reasonable application of a reasonable valuation method to determine the current price input of these awards offered as compensation, according to a new standard issued Monday by FASB.
FASB issued an Accounting Standards Update providing the expedient after endorsing a consensus arrived at by the Private Company Council (PCC).
Companies typically use a valuation technique such as an option-pricing model to determine the value of equity-classified share-based awards issued as compensation to employees and nonemployees. This model requires various inputs, including the fair value of the equity shares underlying a share-option award (which is referred to as the current price input).
The practical expedient permits nonpublic entities to instead use the reasonable application of a reasonable valuation method. According to FASB, the characteristics of this method are the same as the characteristics used in Treasury regulations related to Sec. 409A of the Internal Revenue Code to describe the reasonable application of a reasonable valuation method fee for income tax purposes.
FASB's new practical expedient can be elected for equity-classified share-based awards within the scope of FASB Accounting Standards Codification Topic 718, Stock Compensation. Its amendments apply to all nonpublic entities that issue such awards and elect the practical expedient.
"This ASU addresses issues raised by some stakeholders associated with calculating the fair value of these awards," FASB Chair Richard Jones said in a news release. "It is yet another example of how the PCC continues to help the FASB better meet the needs of private company stakeholders while maintaining the quality of information provided to financial statement users."
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.