{"id":15756,"date":"2021-11-19T19:29:08","date_gmt":"2021-11-20T01:29:08","guid":{"rendered":"https:\/\/sfwpartnersllc.com\/?p=15756"},"modified":"2021-11-19T19:29:08","modified_gmt":"2021-11-20T01:29:08","slug":"fasb-offers-practical-expedient-for-private-companies-that-issue-share-based-awards","status":"publish","type":"post","link":"https:\/\/www.sfw.cpa\/news-and-guides\/fasb-offers-practical-expedient-for-private-companies-that-issue-share-based-awards\/","title":{"rendered":"FASB offers practical expedient for private companies that issue share-based awards"},"content":{"rendered":"

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On October\u00a025, the Financial Accounting Standards Board (FASB) issued a simpler accounting option that will enable private companies to more easily measure certain types of shares they provide to both employees and nonemployees as part of compensation awards. Here are the details.<\/p>\n

Complex rules<\/strong><\/p>\n

Many companies award stock options and other forms of share-based payments to workers to promote exceptional performance and reduce cash outflows from employee compensation. But accounting for these payments can be confusing and time-consuming, especially for private companies.<\/p>\n

To measure the fair value of stock options under existing U.S. Generally Accepted Accounting Principles (GAAP), companies generally use an option-pricing model that factors in the following six variables:<\/p>\n

    \n
  1. The option\u2019s exercise price,<\/li>\n
  2. The expected term (the time until the option expires),<\/li>\n
  3. The risk-free rate (usually based on Treasury bonds),<\/li>\n
  4. Expected dividends,<\/li>\n
  5. Expected stock price volatility, and<\/li>\n
  6. The value of the company\u2019s stock on the grant date.<\/li>\n<\/ol>\n

    The first four inputs are fairly straightforward. Private companies may estimate expected stock price volatility using a comparable market-pricing index. But the value of a private company\u2019s stock typically requires an outside appraisal. Whereas public stock prices are usually readily available, private company equity shares typically aren\u2019t actively traded, so observable market prices for those shares or similar shares don\u2019t exist.<\/p>\n

    To complicate matters further, employee stock options are also subject to Internal Revenue Code Section\u00a0409A, which deals with nonqualified deferred compensation. The use of two different pricing methods usually gives rise to deferred tax items on the balance sheet.<\/p>\n

    Simplification measures<\/strong><\/p>\n

    Accounting Standards Update (ASU) No.\u00a02021-07, Compensation-Stock Compensation (Topic\u00a0718): Determining the Current Price of An Underlying Share for Equity-Classified Share-Based Awards<\/em>, applies to all equity classified awards under Accounting Standards Codification Topic\u00a0718, Stock Compensation<\/em>.<\/p>\n

    The updated guidance allows private companies to determine the current price input in accordance with the federal tax rules, thereby aligning the methodology used for book and federal income tax purposes. Sec.\u00a0409A is referenced as an example, but the rules also include facts and circumstances identified in Sec.\u00a0409A to consider for reasonable valuations. The practical expedient will allow private companies to save on costs, because they\u2019ll no longer have to obtain two independent valuations separately for GAAP and for tax purposes.<\/p>\n

    Right for your company? <\/strong><\/p>\n

    Private companies that take advantage of the practical expedient will need to apply it prospectively for all qualifying awards granted or modified during fiscal years beginning after December\u00a015, 2021, and interim periods within fiscal years beginning after December\u00a015, 2022. Early application, including application in an interim period, is permitted for financial statements that haven\u2019t yet been issued or made available for issuance as of October\u00a025, 2021. Contact your CPA for more information.<\/p>\n

    \u00a9 2021<\/em><\/p>\n

    <\/body>
    \n<\/html><\/p>\n","protected":false},"excerpt":{"rendered":"

    On October\u00a025, the Financial Accounting Standards Board (FASB) issued a simpler accounting option that will enable private companies to more easily measure certain types of shares they provide to both employees and nonemployees as part of compensation awards. Here are the details. Complex rules Many companies award stock options and other forms of share-based payments […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[13,7,10],"tags":[8,11,12],"class_list":["post-15756","post","type-post","status-publish","format-standard","hentry","category-aa","category-articles","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15756","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15756"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15756\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15756"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15756"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15756"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}