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Debate on Private Company Stock Compensation Continues With no Resolution

The FASB thought it was ready to present its Private Company Council (PCC) with three options to simplify accounting for stock compensation for private companies.After much debate, PCC members told the board that there were no clear answers for calculating the potential liabilities, and the accounting board now plans to research the issue further.

Private companies want the FASB to do more research on its effort to simplify the accounting for employee stock compensation granted by privately held businesses.

The FASB discussed three potential simplifications with its Private Company Council (PCC) on December 11, 2014, but after much debate, it was clear the standard-setter hadn’t come up with a satisfactory approach.The FASB now plans to discuss the topic again at its December 17 board meeting.

The FASB is considering three alternatives to simplify the method private companies use to calculate the value of future promises make to employees.But PCC members told the accounting board that the calculations serve no purpose because few employees cash in the rewards.

“I don’t know what percentage of people never get anything, but I would suggest it’s more than the people that get something,” said PCC member Mark Ellis, the CFO for KAS Direct LLC in Hicksville, New York.

Companies often award stock or options to employees, especially to executives, as incentives to stick around as a business grows or if it gets bought by a bigger venture.The reality, however, is that most employees get very little from the stock and option awards because their companies don’t go public and realize impressive gains in their share prices.

“We should be serious when we’re thinking about trying to find out what the end amount is because the risks and uncertainties are so great there that in many, many cases it’s zero,” Ellis said.

FASB members were not 100 percent sold that this was the case, but they agreed they needed to do more research.

“The approach that [the FASB staff] put forward was this is a complex valuation, and what we need to do is minimize the cost of the valuation, but still have the division,” FASB member Thomas Linsmeier said. “But now this conversation is changing it in its entirety.”

The FASB in October added a project to its agenda to examine accounting for stock options and employee compensation.

The project is an attempt to follow up on research the FASB’s staff conducted in 2013 and 2014, suggestions the board received as part of its broader simplification initiative, discussions between the board and the PCC, and the review the board’s parent, the Financial Accounting Foundation (FAF), concluded in August on SFAS No. 123 (R), Share-Based Payment,(FASB ASC 718).

The FASB at its December 10 weekly meeting reviewed three potential “practical expedients” or accounting simplifications for private companies.The simplifications revolved around estimating the expected term for employee share option awards, how to classify awards with repurchase features, and measuring stock payments at either fair value or intrinsic value, which the FASB says is the difference between the fair value of the underlying shares and the exercise price.

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