JofA Article
Written by Ken Tysiac
Accounting for employee share-based compensation could become less complex for private companies after FASB on Wednesday endorsed the decision by the Private Company Council (PCC) to propose a practical expedient for nonpublic entities.
Share-based payment accounting has been discussed by the PCC on several occasions since 2013 because of two concerns:
- The permitted methods for valuing share-based awards may be less appropriate for private company awards than public company awards.
- The permitted methods present unique challenges for private companies because of their ownership structure.
Current GAAP provides private companies with practical expedients for the valuation of expected volatility and the expected term of share-based payments. But no practical expedient exists for valuation of the underlying share price, which generally is the most costly and complex input to determine and audit, according to a PCC document.
At a meeting in December 2019, the PCC discussed a practical expedient that aligns with the measurement philosophy for determining the underlying share price with the measurement philosophy articulated in Sec. 409A of the Internal Revenue Code, which governs the inclusion in gross income of deferred compensation under nonqualified deferred compensation plans for federal tax purposes.
The PCC decided that the practical expedient should only reference procedures meeting the rebuttable presumption of reasonableness in Treasury regulations under Sec. 409A. Regs. Sec. 1.409A-1(b)(5)(iv)(B)(2) states that using any of the following three valuation methods will qualify for the presumption of reasonableness:
- A valuation by a qualified, independent appraiser within the preceding 12 months.
- A valuation based on a formula that, if used as part of a nonlapse restriction with respect to the stock, would be considered to be the fair market value of the stock.
- A valuation made reasonably and in good faith and evidenced by a written report that considers the relevant factors of illiquid stock of a startup corporation.
FASB voted 6–1 to issue an exposure draft proposing the practical expedient. The ED is scheduled to be issued in April with a 45-day comment period.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA’s editorial director.