FASB offers expedient way for private companies to account for share-based awards

Accounting

The Financial Accounting Standards Board released an accounting standards update Monday to help nonpublic companies that provide equity-classified share-based awards to executives.

While stock options are common at public companies, many private businesses also issue equity-classified share-based awards to compensate both their employees and non-employees. When determining the value of these awards, companies generally use a valuation technique such as an option-pricing model. But such a model can be complicated to use, requiring various inputs, including the fair value of the equity shares underlying a share-option award, often referred to as the current price input.

FASB’s accounting standards update gives private companies the option to opt for a practical expedient to figure out the current price input of equity-classified share-based awards issued as compensation using the reasonable application of a reasonable valuation method. The characteristics of such a method are similar to those used in the Treasury Department’s regulations for Section 409A of the Internal Revenue Code to describe the reasonable application of a reasonable valuation method for income tax purposes.

“This ASU addresses issues raised by some stakeholders associated with calculating the fair value of these awards,” said FASB chair Richard Jones in a statement. “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.”

FASB chairman Richard Jones

The update originated with the Private Company Council, a group that advises FASB on private company issues, and was endorsed by FASB at a board meeting in August (see story).

The practical expedient in the accounting standards update can be elected for equity-classified share-based awards within the scope of FASB Accounting Standards Codification Topic 718, Stock Compensation, and its amendments apply to all nonpublic entities (as defined in FASB’s Master Glossary of the Codification) that issue equity-classified share-based awards and opt for the practical expedient.

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