FASB Seeks Public Comment on Private Company Council Proposal on Determining Current Price of an Underlying Share for Equity-Classified Share-Option Awards
Norwalk, CT—August 17, 2020—The Financial Accounting Standards Board (FASB) today issued a proposed Accounting Standards Update (ASU) intended to reduce cost and complexity for private companies when determining the fair value of the shares underlying a share-option award on its grant date or modification date. Stakeholders are encouraged to review and provide comment on the document—a proposal of the Private Company Council (PCC)—by October 1, 2020.
“Members of the PCC conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders,” stated FASB Chair Richard R. Jones. “The proposed ASU puts forth a potential solution to this issue, and we look forward to hearing what our stakeholders think about it.”
“The PCC proposal responds to an area that private company stakeholders have said they think can be improved,” added PCC Chair Candace Wright. “We encourage them to review the proposed ASU and share their views on it.”
The PCC shared stakeholder concerns that determining the fair value of traditional private company share-option awards is often costly and complex. This is primarily because the private company equity shares underlying the share option often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist.
The proposed ASU would allow a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the U.S. Department of the Treasury that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the U.S. Internal Revenue Code.
The proposed ASU is available at www.fasb.org.