The American Institute of CPAs has released one of its Accounting and Valuation Guides, “Valuation of Privately Held Company Equity Securities Issued as Compensation,” also known as the Cheap Stock Guide, in an e-book format.

The guide has been developed by AICPA staff and the Equity Securities Task Force and is the first in a series of three new AICPA Accounting Valuation Guides that the Institute plans to release. The release reflects best practices developed over the previous decade.

The print version of the guide is scheduled to be published in July. Since the issuance of FASB ASC 718 and 505-50 in 2004, valuing stock-based compensation, or “cheap stock," has been a significant challenge for private companies. The Cheap Stock Guide has been designed to meet those challenges, through guidance and illustrations related to accounting, disclosures and valuation of privately held company equity securities issued as compensation. The guide includes information on evaluating private and secondary market transactions, and what companies should do when transaction activity doesn't match their estimates of value.

The book also covers adjustments for control and marketability, including how companies should think about the value of the enterprise for the purpose of valuing minority securities, when it is appropriate to apply a discount for lack of marketability, and how they should support the estimated discount.

For highly leveraged entities, the guide includes advice on how companies can incorporate the fair value of debt in the valuation of equity securities, and the impact of leverage on the expected volatility of various securities. Other topics include the relevance of ASC 820 (SFAS 157) to cheap stock issues.

This guide represents an update of a 2004 AICPA practice aid by the same name. Updated guidance and illustrations explain the valuation of, and disclosures related to, privately held company equity securities issued as compensation. This guide also provides expanded valuation material to reflect advances in the theory and practice of valuation since 2004. This edition includes guidance from FASB ASC 718, 505-50, 820-10 and SSVS 1 which were all issued since the last AICPA guidance dedicated to this issue.

In connection with the release of the guide, the AICPA will present a webcast on June 25th from 1:00 to 3:00 pm ET during which task force representatives who worked on the guide will discuss the main provisions of the new guide. For more information on the webcast, click here.

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