FASB weighs change in accounting for value of share-based options

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The Financial Accounting Standards Board is considering a proposal from its sister organization, the Private Company Council, aimed at reducing the cost and complexity for private companies when they need to decide on the fair value of the shares underlying a share-option award on its grant date or modification date.

The PCC shared concerns from some of its constituents that determining the fair value of traditional private company share-option awards is often costly and complex. That’s mainly because the private company equity shares underlying the share option often aren’t actively traded and, therefore, observable market prices for those shares or similar shares simply don’t exist.

Like FASB, the PCC is overseen by the Financial Accounting Foundation, but doesn’t have the authority to set standards itself. Instead, its members meet to hear the concerns of private companies about the impact of FASB standards on their businesses and if the rigorous standards for publicly traded companies can be eased for smaller privately held companies.

“Members of the PCC conveyed concerns that current guidance on determining fair value for these shares creates unnecessary cost and complexity for some stakeholders,” said FASB Chairman Richard Jones in a statement Monday. “The proposed ASU puts forth a potential solution to this issue, and we look forward to hearing what our stakeholders think about it.”

The proposed accounting standards update would permit a nonpublic entity to determine the current price of a share underlying an equity-classified share-option award using a valuation method performed in accordance with specific regulations of the Treasury Department that provide acceptable methodologies to comply with the “presumption of reasonableness” requirements of Section 409A of the Tax Code.

“The PCC proposal responds to an area that private company stakeholders have said they think can be improved,” said Candace Wright, the chair of the PCC, in a statement. “We encourage them to review the proposed ASU and share their views on it.”

FASB is asking for comments on the PCC proposal by Oct. 1, 2020.

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