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Private Company Council Votes to Finalize Accounting Workaround Related to Share Option Awards

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

The Private Company Council (PCC) on June 22, 2021, approved the issuance of a new standard this year related to pricing equity-classified share option awards.

The rules would be effective prospectively for fiscal years on or after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, the PCC said. Earlier application would be allowed.

A new standard will be issued this year subject to FASB endorsement, according to the discussions.

“We’ve been working on this project for a long time,” PCC Chair Candace Wright said. “We’ve consistently heard that share-based compensation was somewhat difficult and seemed overly complex and costly from a private company perspective so that’s why the PCC decided to take this on,” she said.

The guidance is aimed at providing a simpler and less costly way for private companies to determine the fair value of share-option awards at grant date or upon a modification to an award. The PCC is the body that works with the FASB to amend and develop U.S. GAAP for private companies.

The new rules would allow private companies to determine the current price input in accordance with certain valuation procedures described in the U.S. Internal Revenue Code Section 409A and the associated Treasury Regulations (Section 409A). Section 409A would be referenced as an example, but the rules would also include facts and circumstances (as stated in Section 409A) to consider for reasonable valuations. In essence, the forthcoming guidance would be in line with what most companies are already doing, the discussions indicated.

Under current rules, “when determining the grant-date fair value of those awards, a valuation technique such as an option pricing model is typically used,” according to a rough draft of the standard. An option-pricing model requires various inputs, including the fair value of the equity shares underlying a share-option award (referred to as the current price input).

During research and outreach, PCC said it received feedback “that the current price input is typically the most difficult input for private companies to estimate.” This is primarily because private company equity shares “often are not actively traded and, thus, observable market prices for those shares or similar shares do not exist.”

The PCC on June 22 discussed whether the proposed reference example to Section 409A of the valuation should be kept in the forthcoming standard or shifted to the “basis of conclusions” section of the document. PCC member Michael Minnis, who raised the issue, expressed concerns that changes in Treasury Regulation would later prove redundant to GAAP, and add cost.

A majority of the PCC said the example should be kept, believing it would be simpler and eliminate confusion.

“First of all, treasury regulations are very hard to change, the treasury department goes through a long deliberative process to change their regulations and so were that ever to happen we’d have plenty of lead time to understand what treasury was doing,” Timothy Curt, former managing director of Warburg Pincus LLC, said.

“We want people to only have to look at one set of rules, do one valuation and have that be compliant with the practical expedient. I think we hit on exactly the right balance,” he said.

The PCC’s discussions were in relation to Proposed Accounting Standards Update (ASU) No. 2020-200Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Option Awards, a Proposal of the Private Company Council, which was issued in August 2020. The rules would apply to all equity classified awards under Topic 718, Compensation—Stock Compensation.


This article originally appeared in the June 23, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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