FASB issues accounting standard update on private company stock compensation

The US Financial Accounting Standards Board (FASB) on October 25 published an accounting standard update (ASU) on determining the current price of an underlying share for equity-classified share-based awards by private companies.

The update responds to feedback that determining the fair value of private company share-option awards is too costly and complex.

Under the update, as a “practical expedient,” private companies may “determine the current price input of equity-classified share-based awards issued to both employees and nonemployees using the reasonable application of a reasonable valuation method.”

It further describes the characteristics of a “reasonable application of a reasonable valuation method.” The characteristics coincide with those under the tax regulations for Internal Revenue Code section 409A, relating to the inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.

The amendment is effective for awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early application of the amendment is permitted for financial statements not issued as of October 25.

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