FASB PROVIDES PRACTICAL EXPEDIENT TO PRIVATE COMPANIES THAT ISSUE EQUITY-CLASSIFIED SHARE-BASED AWARDS
Norwalk, CT, October 25, 2021—The Financial Accounting Standards Board (FASB) today issued an Accounting Standards Update (ASU) to improve an area of financial reporting for nonpublic business entities (private companies) that issue equity-classified share-based awards. The ASU is a consensus of the Private Company Council (PCC) that was endorsed by the FASB. The PCC is the primary advisory body to the FASB on private company matters.
“This ASU addresses issues raised by some stakeholders associated with calculating the fair value of these awards,” stated FASB Chair Richard R. Jones. “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.”
Many private companies issue equity-classified share-based awards as compensation to employees and non-employees. When determining the value of these awards, companies typically use a valuation technique such as an option-pricing model. This model requires various inputs, including the fair value of the equity shares underlying a share-option award (referred to as the current price input).
The ASU provides private companies the option to elect a practical expedient to determine 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 this method are the same as the characteristics used in the regulations of the U.S. Department of the Treasury related to Section 409A of the U.S. Internal Revenue Code (the Treasury Regulations) to describe the reasonable application of a reasonable valuation method for income tax purposes.
The practical expedient in this ASU 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 (as defined in the Master Glossary of the Codification) that issue equity-classified share-based awards and elect the practical expedient.
The ASU is available at www.fasb.org.