Plan to Amend Stock Compensation Disclosure Rules for Private Companies Scrapped After 2 Years of Study

The FASB’s main advisers for private companies decided not to amend stock compensation disclosure rules, voting 8 to 3 to drop that effort. The decision comes after two years of study.

The Private Company Council (PCC) said there are more pressing topics that need to be addressed, and stock compensation disclosure issues are not broadly pervasive for private companies.

“We also did not believe the cost savings to preparers or practitioners would be significant but there would be costs potentially to users in needing to gather data that they have available to them now,” new PCC Chair Jere Shawver, said on April 18, 2024. “In addition, we’re not sure that we would really know what we would change and given the time that’s been spent on that that seems to be a relatively important element,” said Shawyer, managing partner of assurance and risk at Baker Tilly. “There has clearly been a lot of work done on this…. I’ll use my analogy ‘just because we’ve dug a hole that doesn’t mean we should dig a bigger hole.’”

The PCC is composed of 12 members who work at various companies as financial statement preparers, auditors, and users. One member was absent. Some PCC members expressed concerns that the PCC’s credibility could be harmed as the process to study the topic was a long and unfruitful one that involved public feedback.

“As a member of the working group I do understand where the recommendation is coming from given that we didn’t get as much cost-benefit as we had anticipated as part of all the work that was done,” Holly Nelson, chief executive officer at Key Advisory Services, said. “I am a little concerned given that this was an issue that was brought to the PCC numerous times, and to go as far as we did and now abandon it, I’m a little concerned about the credibility for the PCC going forward, because we continued to ask for feedback and then we take a project on and then we don’t carry it over the finish line.”

Discussions Date Back to 2014

Since its formation in May 2012, the PCC has discussed various aspects of the guidance in Topic 718, Compensation—Stock Compensation, which applies to all entities that enter into share-based payment transactions. The discussions on stock compensation disclosures date back to December 2014 and were restarted on a regular basis in 2021.

The problem raised was that stock compensation disclosures are costly and complex to prepare and audit and that certain disclosures lack “decision-usefulness” for private company financial statement users. Topic 718 mostly originated from FASB Statement (SFAS) No. 123 (revised 2004), Share-Based Payment, which was issued in December 2004. That guidance has been effective for private companies since the first annual reporting period that began after December 15, 2005 (calendar year 2006). Several of the disclosures were amended or added in recent years.

In mid-2022, a PCC “Stock Compensation Disclosures Working Group” was formed to discuss stock compensation disclosures in greater depth, with the initial objective of identifying whether a problem exists for private companies. The working group was made up of four PCC members (a preparer, two practitioners, and an academic user).

The working group and FASB staff spoke with practitioners at public accounting firms of varying sizes, including Big 4, large national, and smaller, regional firms, according to meeting papers. Most practitioners noted that their clients with stock compensation are largely owned by private equity (PE) firms or are venture capital-backed (VC-backed) startup companies.

Staff Didn’t Recommend Project

Ultimately, FASB staff didn’t recommend that a project should be added, finding that preparers and practitioners “do not think that a significant or pervasive problem exists with respect to the cost and complexity for private companies to prepare and for auditors to audit stock compensation disclosures,” according to the discussions.

While some reduction in cost and complexity may result from disclosure reductions for private companies, “other factors were identified as contributing to the cost and complexity, such as the complexity of the terms and conditions in the arrangements, the type of awards granted, the frequency in which awards are granted, the systems being used for tracking and preparing the disclosures, as well as the size and sophistication of the private company personnel.”

Further, the staff ‘s analysis of the Private Company Decision-Making Framework (PCDMF) concluded that the disclosures can be prepared at a reasonable cost.

The PCDMF was also used to analyze for users of financial statements whether there is a significant or pervasive need to improve GAAP, but staff found: “As user views were varied, there was no consensus or conclusive evidence to suggest that the disclosures are not relevant to users, or that a pervasive need to improve GAAP exists.”