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Once a nonpublic company files an initial prospectus in preparation to sell equity securities, the company is considered a public company under ASC 718. When that occurs, the company may have to change some of its accounting policies because of the measurement methods available only to nonpublic companies (refer to SC 6.2).

6.5.1 Measurement of equity awards when going public

If a nonpublic company was using the calculated value method to measure awards classified as equity, it will measure all new stock-based compensation awards using the fair value method upon becoming a public company. The company should continue to recognize stock-based compensation cost using the calculated value method for awards granted before becoming a public company unless those awards are subsequently modified, repurchased, or cancelled. If the award is subsequently modified, repurchased, or cancelled, the event would be assessed under ASC 718's provisions for a public company (i.e., at fair value).

6.5.2 Measurement of liability awards when going public

A nonpublic company may need to change the method of measuring awards classified as liabilities after it becomes a public company. If the nonpublic company had previously chosen to measure its liability awards using the intrinsic value or calculated value method under ASC 718, it should measure those same awards at their fair value at the date the company is considered public. If a change in measurement is made, the effect of the change should be recognized in the period the company becomes a public company, as discussed in SAB Topic 14 (Section B, Question 2).
For example, assume that on December 31, 20X0, a calendar year company has a vested liability award that is measured at its intrinsic value of $10. On March 2, 20X1, the company files its initial prospectus (i.e., becomes a public company as defined by ASC 718) when the award's intrinsic value is $13 and its fair value is $15. The company should have recognized compensation cost of $3 between January 1 and March 2 under the intrinsic value method. Additionally, the company should recognize $2 of compensation cost to reflect the change from intrinsic value to fair value during the period in which the company becomes public. The company should remeasure the award to its fair value at the end of each quarter that the award remains outstanding and record compensation cost for any changes in fair value in the current period.
SAB Topic 14 does not specify how the adjustment from intrinsic value to fair value should be presented in the financial statements (i.e., the $2 of compensation cost in this example).
We believe the change from an intrinsic value method to a fair value method is consistent with the definition of a change in accounting principle as described in ASC 250, Accounting Changes and Error Corrections. ASC 250-10-45-5 provides for changes in accounting principles to be applied retrospectively, unless impractical. We believe determining the effects of the change from the intrinsic to the fair value method would be impractical. Generally, a company would not be able to independently assess the fair value of the liability awards granted in prior periods; thus, prior periods should not be adjusted. This is consistent with the guidance in SAB Topic 14 (Section B, Question 3), which states that a company should not retrospectively apply the fair value method to its awards. As a result, we believe the incremental compensation costs as a result of a change to the fair value method should be recognized either through beginning retained earnings or as compensation cost in the current period.

6.5.3 Award disclosures when going public

Because a change in measurement method likely results when a nonpublic company becomes public, SAB Topic 14 requires that a company's MD&A include the specific changes in accounting policy that are required under ASC 718 in subsequent periods and the likely future effects.

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