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FASB Proposal Related to Equity-Classified Share Options Delayed Until Crisis Abates

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Denise Lugo

A FASB proposal that would leverage Internal Revenue Code Section 409A valuation procedures for finding the current price on an underlying share for certain types of stock options will be deferred for at least a month, according to Private Company Council (PCC) discussions on April 17, 2020.

The PCC said they agreed with the board’s decision to suspend the proposal until mid-May or later when the work upheaval caused nationwide by the novel coronavirus (COVID-19) pandemic eases up.

“We know our stakeholders are busy running their businesses, helping their clients and just managing through this challenging environment that we have now, and responding to an exposure draft may not be in the cards or at the top of their list right now,” PCC Chair Candace Wright said. “So I think delaying it was the prudent thing to do,” said Wright, a director with Postlethwaite & Netterville, a Louisiana-based accounting and business advisory firm.

In agreeing to the delay, the panel reaffirmed their full support for the forthcoming proposal, which was not unanimously cleared by the FASB. The board in February voted 6 to 1 to issue it.

“I have reviewed the draft and I think it’s in great shape, and I do eagerly await the opportunity to get feedback from the broader community about the practical expedient,” Timothy Curt, former managing director of Warburg Pincus LLC in New York, said. “I think it will be a beneficial item for our stakeholders and recognizing that we are in unusual circumstances I do think it is appropriate for us to hold off on issuing it until stakeholders have an opportunity with a clear head and ability to get organized around it to give us clear feedback on it,” Curt said. “A delay that is contemplated makes complete sense.”

The FASB had planned to issue the proposal in early April, with a 45-day comment period so that it could be quickly finalized. The changes were developed to provide a simpler, less costly way for private companies to determine the “grant-date fair value of an equity-classified share option award.

If finalized, the provisions will enable private companies to opt to utilize valuation procedures in IRC Section 409A and the associated Treasury regulations to figure out the current price input used to determine the “grant-date fair value of an equity-classified share option award,” terminology that speaks to the nuances of the matter being addressed. IRC Section 409A, effective January 1, 2005, regulates taxation of nonqualified deferred compensation.

The proposal would provide a practical expedient that enables companies to use a valuation in accordance with the “presumption of reasonableness” requirements of Section 409A. When a valuation qualifies for the “presumption of reasonableness” it is expected to be a reasonable application of a reasonable valuation method, according to a board handout. A practical expedient is a cost-effective way of achieving the same or a similar accounting or reporting objective as an original provision in GAAP.

The proposal would narrowly amend Topic 718, Compensation–Stock Compensation, for private companies.

The FASB on April 8 said it would suspend issuance of most accounting standards updates and proposals and shift its focus to helping companies navigate the pandemic.


This article originally appeared in the April 20, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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