The AICPA is proposing to revise the way in which cheap stock is measured. (Cheap stock is the term often used to describe the shares (usually common stock) issued to management and board members as incentive compensation through stock options and restricted share grants.)
The new AICPA practice aid, “Valuation of Privately Held Company Equity Securities Issued as Compensation” replaces the 2004 “Valuation of Privately Held Company Equity Securities Issued as Compensation” practice aid. The new practice aid provides current best practices for valuation and disclosures of privately held company equity securities. Guidelines are based on FASB ASC 718 Compensation – Stock Compensation and FASB ASC 505-50 Equity Based Payments to Non-Employees.
Equity security valuations must conform to fair value as described in FASB ASC 718. Though other fair value measurements can be used in the valuation of equity securities, FASB ASC 718 is the ruling regulatory guideline over FASB ASC 820 Fair Value Measurements and Disclosures.
In the new AICPA practice aid provides updated information for IPO implications, stages of enterprise development, marketability and control premiums, accounting and disclosures, and other factors to consider in performing valuations of privately held companies.
For many companies with outsider preferred stock investors, the value of common stock can be difficult to measure when the preferred shares have so many priority rights on first dollars out and dividend payments. With detailed examples pertaining to real options preferred stock rights and implications, and liquidity scenarios, the new practice aid provides practical analysis and guidelines for valuation of privately held companies.