AICPA Releases Working Draft of Two Revised Chapters for Next Edition of Accounting and Valuation Guide
Overview
On June 23, 2024, the AICPA’s Financial Reporting Executive Committee (“FinREC”)
announced the release of a working draft of two revised chapters that are ultimately
expected to be included in the next edition of the AICPA Accounting and
Valuation Guide Valuation of Privately-Held-Company Equity Securities Issued as
Compensation (the “AICPA Valuation Guide”):
- Chapter 8, “Inferring Value From Transactions in a Private Company’s Securities.”
- Chapter 9, “Selected Accounting and Disclosure Matters.”
FinREC established the Equity Securities Task Force (the “Task Force”) to develop
the revisions, which are primarily intended to expand the interpretive guidance
on the comprehensive framework for evaluating and assessing the impact of
secondary transactions and to better align the AICPA Valuation Guide with the
accounting literature issued after the publication of the guide’s current
edition in 2013.
The Task Force is seeking informal feedback from the public on the working draft
by September 20, 2024, and has indicated that it will keep comments confidential
and will not post them on the AICPA’s Web site.
Proposed Revisions to Chapter 8
Background
The purpose of the guidance in Chapter 8 is to give entities a “framework for
calibrating to [primary1 and secondary2] transactions in the company securities for evaluating and assessing their
impact on estimating fair value of the equity securities underlying awards of
stock-based compensation.” The updates to the chapter expand the interpretive
guidance and the framework for applying the measurement principles in ASC 8203 as well as for assessing the relevance of primary and secondary
transactions associated with such estimations. The decision tree below, which
the Task Force developed for the assessment of secondary transactions, is
reproduced from paragraph 8.07 of the working draft.
The Task Force believes that entities will most likely navigate
to the bottom box of the above decision tree because a secondary transaction
that involves a private company’s equity securities is highly unlikely to be for
identical securities in an active market that is the principal market on the
same measurement date. Secondary transactions for a private company typically
occur in a secondary market, which would not typically be considered an active
market. In addition, the Task Force believes that it is rare for a transaction
to be considered not orderly. The revised chapter summarizes the considerations
presented in the above decision tree, including how much weight to place on
these transactions:
|
Topic
|
Considerations
|
Revised Chapter 8 Paragraphs
|
|---|---|---|
|
Unit of account
|
Understanding which security is being
valued and the purpose of the measurement is a critical
first step in working through the decision tree
above.
|
8.13 through 8.15
|
|
Determining the principal market
|
8.16 through 8.24
| |
|
Calibrating the transactions
|
Private companies periodically may have both primary
transactions and secondary transactions. Entities should
calibrate their valuation models on the basis of these
transactions when they are observable and provide
evidence of fair value.
|
8.25 through 8.40
|
|
Weighing secondary transactions
|
Entities must use significant judgment and consider
various factors in determining the relevance of a
secondary transaction and how much weight to place on it
when calibrating a valuation model.
|
8.41 through 8.48
|
|
Weighing other indications of fair value
|
Observable secondary transactions may need to be
supplemented with other valuation approaches.
|
8.49 through 8.54
|
|
Different types of transactions
|
To help users apply the framework
outlined in Chapter 8, the Task Force provided a list of
the types of primary and secondary transactions that may
be relevant to the fair valuation of equity securities
underlying share-based payment awards.
|
8.55 through 8.66
|
Proposed Revisions to Chapter 9
The updates to Chapter 9 provide a framework based on ASC 718 for
assessing whether a secondary transaction is compensatory. The chapter also
discusses certain disclosure considerations for share-based payment awards.
Contacts
|
|
Sean May
Audit & Assurance
Partner
Deloitte & Touche LLP
+1 415 783 6930
|
|
Henry Wilson
Audit & Assurance
Senior Manager
Deloitte & Touche LLP
+1 312 802 4897
|
Footnotes
1
A primary transaction is defined in 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.”
2
A secondary transaction is defined in 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 are
also considered to be within the scope of secondary transactions.”
3
FASB Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurement. The Task Force believes that the
measurement principles in ASC 820 should be applied unless they are
inconsistent with the guidance in FASB Accounting Standards Codification
Topic 718, Compensation — Stock Compensation.
4
ASC 820-10-20 defines a
principal market as “[t]he market with the
greatest volume and level of activity for the
asset or liability.”
5
ASC 820-10-20 defines the most
advantageous market as “[t]he market that
maximizes the amount that would be received to
sell the asset or minimizes the amount that would
be paid to transfer the liability, after taking
into account transaction costs and transportation
costs.”