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Chapter 4 — Measurement

4.12 Valuation of Nonpublic Entity Awards

4.12 Valuation of Nonpublic Entity Awards

ASC 718-10
Fair-Value-Based
30-2 A share-based payment transaction shall be measured based on the fair value (or in certain situations specified in this Topic, a calculated value or intrinsic value) of the equity instruments issued.

Footnotes

4
The AICPA Valuation Guide provides best-practice guidance for valuing the equity securities of nonpublic entities. It discusses, among other topics, possible methods of allocating enterprise value to underlying securities, enterprise-and industry-specific attributes that should be considered in the determination of fair value, best practices for supporting fair value, and recommended disclosures for a registration statement.
5
A primary transaction is defined in the proposed updates to Chapter 8 as “[a] transaction involving the original issuance of an equity interest in or debt instrument of a privately held company directly by the company to an investor, other than in a public offering. Note that primary transactions may involve existing investors, new investors, or both.”
6
A secondary transaction is defined in the proposed updates to Chapter 8 as “[a]ny purchase or sale, other than the original issuance, of an equity interest in or debt instrument of a privately held company. Such transactions may be completed either in a private transaction between two or more parties, or through a secondary exchange. A secondary transaction differs from a public market transaction in that the securities transacted are not public; therefore, generally the buyers in these transactions are accredited investors, and the issuers of the securities are not subject to public company reporting requirements. For purposes of this guide, a purchase of an equity interest or debt instrument by the company (or its related parties or other economic interest holders) from employees [is] also considered to be within the scope of secondary transactions.”
7
The Task Force believes that the measurement principles in ASC 820 should be applied unless they are inconsistent with the guidance in ASC 718.
8
Cheap stock refers to issuances of equity securities before an IPO in which the value of the shares is below the IPO price.
10
A European option can be exercised only on the expiration date.
11
An Asian option, or average option, is an option contract in which the payoff is based on the average price of the stock over a specific period (as opposed to a single point).
12
ASC 820 defines an orderly transaction as a “transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).” In private-company financing transactions, the usual and customary marketing activities generally include time for the investors to perform due diligence and to discuss the company’s plans with management, the board of directors, or both.
13
For additional information about considering secondary transactions, see Chapter 8 of the AICPA Valuation Guide.