In October 2021, the Financial Accounting Standards Board (FASB) issued an accounting standards update to provide a practical expedient that is intended to reduce the cost and complexity for a private company’s measurement of equity-classified share-based awards.
When a private company issues compensation in the form of equity, one of the challenges is estimating the fair value of the award. This task is difficult for private companies because their stock is not publicly traded and does not have an observable market price. ASU 2021-07, Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards provides a practical expedient that private companies can use to determine the current price input for their share-based compensation accounting.
Non-public business entities (i.e. private companies) that issue equity-classified share-based awards to employees or nonemployees will have the option to use the ASU 2021-07 practical expedient.
Effective Date & Transition
The practical expedient is available on a prospective basis for private entities for all qualifying awards that are granted or modified in fiscal years beginning after Dec. 15, 2021 and interim periods beginning after Dec. 15, 2022. Private companies can early adopt the election for annual or interim periods that have not yet had financial statements issued or made available for issuance as of Oct. 25, 2021, the date the FASB issued the update.
The practical expedient allows private companies to estimate the current price input of their equity-classified share-based awards by using a “reasonable application of a reasonable valuation method.”
The term “reasonable” often involves an element of judgment. The final standard includes detailed characteristics and criteria to consider when evaluating if a method is reasonable. The upshot is that a reasonable application of a reasonable valuation method for income tax purposes is expected to meet the U.S. Generally Accepted Accounting Principles (US GAAP) requirement. Therefore, a private company would need only obtain a single valuation to determine the current price input for the measurement of its share-based compensation award to fulfill both income tax and financial statement reporting purposes rather than separate valuations that comply with ASC Topic 718 and Treasury Regulations.
Read the full ASU here.
If you have questions about ASU 2021-07 or need guidance implementing the update, please contact us.