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15.8 Stock-based compensation—considerations for private companies
Publication date: 31 Mar 2024
us Financial statement presentation guide
This section addresses presentation and disclosure considerations for private companies. ASC 718 defines a “public entity” as an entity that (1) has equity securities that trade on a public market (domestic or foreign), (2) files an initial prospectus in preparation to sell equity securities, or (3) is controlled by an entity that meets either of the first two criteria. Therefore, an entity with only publicly traded debt securities is a “non-public entity” under ASC 718; however, a subsidiary of an entity with publicly traded equity is also considered a public entity.
The presentation and disclosure guidance in this chapter is generally applicable to both public and non-public companies. A non-public entity under the ASC 718 definition that measures awards based on calculated value or intrinsic value should provide the disclosures in FSP 15.4 based on that measure. Additionally, non-public entities under the ASC 718 definition are not required to disclose the aggregate intrinsic value for fully vested awards and awards expected to vest, or for fully vested awards currently exercisable (see FSP 15.4.2).
Although only entities that file their financial statements with the SEC are required to classify certain ASC 718 awards as temporary equity (see FSP 15.3.3 and FSP 15.7.1), other non-public reporting entities should consider presenting these awards in temporary equity.
15.8.1 Private company simplification provisions
There are two simplification provisions included in ASC 718-10-30-20A through ASC 718-10-30-20B and ASC 718-30-30-2A that are only available to non-public entities.
A non-public entity is permitted to make a one-time election to change its measurement basis for all liability classified awards to intrinsic value, without requiring the entity to evaluate whether the change is preferable. Non-public entities that elect this practical expedient must disclose, in their first interim and annual period of adoption, the nature of and reason for the change in accounting principle, as well as the cumulative effect of the change on retained earnings (or other appropriate components of equity or net assets). The guidance also provides non-public entities with a practical expedient for estimating the expected term of the award. If elected, non-public entities must disclose, in their first interim and annual period of adoption, the nature of and reason for the change in accounting principle.
15.8.2 Disclosures in periods prior to an initial public offering
The AICPA accounting and valuation guide Valuation of Privately-Held-Company Equity Securities Issued as Compensation (AICPA guide) provides both valuation and disclosure best practices related to privately-held-company equity securities issued as compensation, including awards that are within the scope of ASC 718. The AICPA guide recommends that private companies include information about stock-based compensation awards granted within 12 months of an initial public offering (in addition to the disclosures required by ASC 718).
Excerpt from AICPA guide, Chapter 14, Accounting and Disclosures
The task force recommends that financial statements included in a registration statement for an initial public offering (IPO) disclose, at a minimum, the following information for equity instruments granted during the 12 months prior to the date of the most recent balance sheet (year-end or interim) included in the registration statement:
a. For each grant date, the number of equity instruments granted, the exercise price and other key terms of the award, the fair value of the common stock at the date of grant, and the intrinsic value, if any, for the equity instruments granted (the equity instruments granted may be aggregated by month or quarter and the information presented as weighted average per share amounts)
b. Whether the valuation used to determine the fair value of the equity instruments was contemporaneous or retrospective
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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