1.7 Nonpublic Entities

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1.7 Nonpublic Entities

ASC 718-10 — Glossary

Nonpublic Entity

Any entity other than one that meets any of the following criteria:

Has equity securities that trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally
Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market
Is controlled by an entity covered by the preceding criteria.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is a nonpublic entity.

Public Business Entity

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.
It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including notes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

Public Entity

An entity that meets any of the following criteria:

Has equity securities that trade in a public market, either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally
Makes a filing with a regulatory agency in preparation for the sale of any class of equity securities in a public market
Is controlled by an entity covered by the preceding criteria. That is, a subsidiary of a public entity is itself a public entity.

An entity that has only debt securities trading in a public market (or that has made a filing with a regulatory agency in preparation to trade only debt securities) is not a public entity.

Several practical expedients are available only to entities that meet the definition of a nonpublic entity in ASC 718. In determining whether it qualifies as a nonpublic entity and can therefore apply the practical expedients, an entity should note that the definition of a public entity is not the same as that of a public business entity, which is separately defined in ASC 718. While an entity uses the definitions of a public entity and a nonpublic entity to apply most of the guidance in ASC 718, it may also need to determine whether it meets the definition of a public business entity when adopting a new standard’s requirements.

1.7.1 Calculated Value

If a nonpublic entity cannot reasonably estimate the fair-value-based measure of its options and similar instruments because estimating the expected volatility of its stock price is not practicable, it should use the historical volatility of an appropriate industry sector index to calculate the value of the awards. The resulting value is referred to as calculated value. See Section 4.13.2.

1.7.2 Intrinsic Value

For liability-classified awards, a nonpublic entity can elect as an accounting policy to measure all of its liability-classified awards at either their intrinsic value or their fair-value-based measure. See Section 4.13.3 for additional information.

1.7.3 Expected Term

A nonpublic entity can elect, as an entity-wide accounting policy, to use a practical expedient in estimating the expected term of certain options and similar instruments. That practical expedient can only be used for awards that meet certain conditions. See Sections 4.9.2.2.3 and 4.13.1.2 for additional information.

1.7.4 Transition to Public Entity

A nonpublic entity that becomes a public entity can no longer use the practical expedients that are available to nonpublic entities, including calculated value and intrinsic value since public entities must use a fair-value-based measurement. In addition, the practical expedient used by nonpublic entities to determine the expected term of certain options and similar instruments is different from that used by public entities. SAB Topic 14.B provides transition guidance on the use of the calculated value or intrinsic value practical expedient for nonpublic entities that are becoming public entities. See Section 4.13.4 for more information.

In October 2021, the FASB issued ASU 2021-07, which allows nonpublic entities to use, as a practical expedient, “the reasonable application of a reasonable valuation method” to determine the current price input of equity-classified share-based payment awards issued in exchange for goods or services. There is no transition guidance on the election of this practical expedient for nonpublic entities that are becoming public entities. Therefore, an entity that no longer meets the criteria to be a nonpublic entity would have to reverse the practical expedient’s effect in its historical financial statements. See Section 4.13.1.3 for more information.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.