4.11 Difficulty of Estimation
ASC 718-10
Difficulty of Estimation
30-21 It should be possible to reasonably estimate the fair value of most equity share options and other equity
instruments at the date they are granted. Section 718-10-55 illustrates techniques for estimating the fair values
of several instruments with complicated features. However, in rare circumstances, it may not be possible
to reasonably estimate the fair value of an equity share option or other equity instrument at the grant date
because of the complexity of its terms.
Intrinsic Value Method
30-22 An equity instrument for which it is not possible to reasonably estimate fair value at the grant date shall
be accounted for based on its intrinsic value (see paragraph 718-20-35-1 for measurement after issue date).
ASC 718-20
Fair Value Not Reasonably Estimable
35-1 An equity instrument for
which it is not possible to reasonably estimate fair value
at the grant date shall be remeasured at each reporting date
through the date of exercise or other settlement. The final
measure of compensation cost shall be the intrinsic value of
the instrument at the date it is settled. Compensation cost
for each period until settlement shall be based on the
change (or a portion of the change, depending on the
percentage of the requisite service that has been rendered
for an employee award or the percentage that would have been
recognized had the grantor paid cash for the goods or
services instead of paying with a nonemployee award at the
reporting date) in the intrinsic value of the instrument in
each reporting period. The entity shall continue to use the
intrinsic value method for those instruments even if it
subsequently concludes that it is possible to reasonably
estimate their fair value.
ASC 718-10-30-21 states, in part, that “in rare
circumstances, it may not be possible to reasonably estimate [the
fair-value-based measure of a share-based payment award as of] the
grant date because of the complexity of its terms” (emphasis added).
That is, there is a strong presumption under ASC 718 that the
fair-value-based measure can be estimated unless there is
substantial evidence to the contrary. Paragraph B103 of FASB
Statement 123(R) emphasizes this presumption by stating that, “[i]n
light of the variety of options and option-like instruments
currently trading in external markets and the advances in methods of
estimating their fair values,” entities should be able to reasonably
estimate the fair-value-based measure of most awards as of the grant
date. Accordingly, accounting for a share-based payment award by
using the intrinsic-value method under ASC 718-20-35-1 would be
permitted only in the unlikely event that there is substantial
evidence indicating that it is not possible to reasonably estimate
the fair-value-based measure of the award.