13.7 Change in Valuation Techniques
ASC 718-10
Consistent Use of Valuation Techniques and Methods for Selecting Assumptions
55-27 Assumptions used to estimate the fair value of equity and liability instruments granted in share-based payment transactions shall be determined in a consistent manner from period to period. For example, an entity might use the closing share price or the share price at another specified time as the current share price on the grant date in estimating fair value, but whichever method is selected, it shall be used consistently. The valuation technique an entity selects to estimate fair value for a particular type of instrument also shall be used consistently and shall not be changed unless a different valuation technique is expected to produce a better estimate of fair value. A change in either the valuation technique or the method of determining appropriate assumptions used in a valuation technique is a change in accounting estimate for purposes of applying Topic 250, and shall be applied prospectively to new awards.
SEC Staff Accounting Bulletins
SAB Topic 14.C, Valuation Methods
[Excerpt]
Question 3: In
subsequent periods, may a company change the valuation
technique or model chosen to value instruments with similar
characteristics?21
Interpretive
Response: As long as the new technique or model
meets the fair value measurement objective as described in
Question 2 above, the staff would not object to a company
changing its valuation technique or model.22 A
change in the valuation technique or model used to meet the
fair value measurement objective would not be considered a
change in accounting principle.23 As such, a
company would not be required to file a preferability letter
from its independent accountants as described in Rule
10-01(b)(6) of Regulation S-X when it changes valuation
techniques or models. However, the staff would not expect
that a company would frequently switch between valuation
techniques or models, particularly in circumstances where
there was no significant variation in the form of
share-based payments being valued. Disclosure in the
footnotes of the basis for any change in technique or model
would be appropriate.24
______________________________
21 FASB ASC paragraph
718-10-55-17 indicates that an entity may use different
valuation techniques or models for instruments with
different characteristics.
22 The staff believes that a
company should take into account the reason for the change
in technique or model in determining whether the new
technique or model meets the fair value measurement
objective. For example, changing a technique or model from
period to period for the sole purpose of lowering the fair
value estimate of a share option would not meet the fair
value measurement objective of the Topic.
23 FASB ASC paragraph 718-10-55-27.
24
See generally FASB ASC paragraph 718-10-50-1.
ASC 718-10-55-27 states, in part, that the “valuation technique an entity
selects . . . shall be used consistently and shall not be changed unless a different
valuation technique is expected to produce a better estimate of fair value.” It also
states that a change in valuation technique should be accounted for as a change in
accounting estimate under ASC 250 and applied prospectively to new awards. In
addition, Question 3 of SAB Topic 14.C states that the SEC staff would not object to
a change in an entity’s valuation technique or model as long as the new technique or
model meets the fair value measurement objective of ASC 718.
ASC 250-10-50-5 indicates that entities do not need to disclose the information required by ASC 250-10-
50-4 for a change in estimate that results from a change in valuation technique. However, SAB Topic
14.C states that for a share-based payment award, “[d]isclosure in the footnotes of the basis for any
change in technique or model would be appropriate.” Accordingly, entities are encouraged to disclose
the basis for a change in their technique for valuing share-based payment awards. In addition, SEC
registrants may consider additional disclosures in MD&A if the change in estimate materially affected the
entity’s results of operations.