Determining the fair value of private company stock-option awards at grant date or upon a modification to an award is often costly and complex because its equity shares often are not actively traded and no market price is readily available. When determining the grant-date fair value of those awards of a private company, a valuation technique such as an option-pricing model is typically used under the existing generally accepted accounting principles (GAAP). The Private Company Council (PCC) received feedback that the current valuation method is complex and costly, and has therefore proposed on October 1, 2020 a practical expedient that would be effective prospectively for all stock-option awards granted or modified during fiscal years beginning on or after the effective date of the proposal.
Currently, nonpublic entities obtain separate external valuations to satisfy the requirements of both Topic 718 and IRC section 409A. Under this proposed practical expedient, when adopted, a nonpublic entity is allowed to determine the current price input of equity-classified share-option awards issued to both employees and nonemployees using a valuation method performed in accordance with the regulations of the Internal Revenue Code section 409A. Currently, nonpublic entities obtain separate external valuations to satisfy the requirements of both Topic 718 and IRC section 409A.
Click the link below to view the Proposed ASU (Topic 718)