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The amendments to ASU 2021-07 provide non-public entities with a convenient means to use to determine the “current price” of an equity-classified share-based payment award issued to employees and non-employees. The current price is used to calculate the fair value of the award.
Background
Share-based payment awards classified as equity, such as stock options, are initially measured at fair value at the grant date and are generally not subsequently remeasured. The most common valuation technique used by non-public entities to estimate the grant date fair value of stock options is the Black-Scholes-Merton model. This option pricing model requires various inputs, including the fair value of the shares underlying the option, called value current price entry. If an observable market price for current price input is not available, which is generally the case with non-public entities, the fair value of the share underlying the award is estimated.
Private company stakeholders told the FASB’s Private Company Board that shares of private companies are generally not actively traded and therefore do not have an observable market price. Therefore, the current price input is usually complex and expensive to estimate.
Unit of account and disclosure
The practical expedient of ASU 2021-07 permits a non-public entity to determine the current price of a stock option using the “reasonable application of a reasonable valuation method”, which is determined at the valuation date of the award, taking into account the following factors:
- The value of tangible and intangible assets of the non-public entity
- The present value of the entity’s expected future cash flows
- The market value of shares or interests in similar entities engaged in substantially similar businesses or businesses
- Recent arm’s length transactions involving the sale or transfer of shares or equity interests in the entity
- Other relevant factors, such as control premiums or rebates for lack of marketability
- The entity’s consistent use of a particular valuation method to determine the value of shares or assets for other purposes
Finally, the amendments specify that “reasonable application of a reasonable valuation method” can not use a value calculated more than 12 months before the measurement date, and that the value used should be updated for all significant information subsequent to the value of the entity.
The Amendments specifically recognize that a valuation conducted pursuant to Treasury Regulation §1.409A-1(b)(5)(iv)(B) would include “reasonable application of a reasonable valuation method.”
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