Practical Expedient to Determine Price Input for Fair Value Calculations

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2021-07, Compensation—Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards.

The ASU intends to reduce cost and complexity for nonpublic entities when determining the grant-date fair value of certain share-based awards.

It provides nonpublic entities with an optional practical expedient to determine the current price input of equity-classified awards using the reasonable application of a reasonable valuation method, rather than measuring it at fair value.

Key Provisions

Based on feedback from private company stakeholders, this ASU is a consensus of the Private Company Council that was endorsed by the FASB.

Current Guidance

Under Topic 718, equity-classified share-based awards are initially measured at fair value at the grant date and only subsequently remeasured upon a modification if certain criteria are met.

If an observable market price for the award isn’t available, the fair value should be estimated using a valuation technique—such as the Black-Scholes model or lattice model. The Black-Scholes model is the most common valuation method as it’s generally considered to be the least complex.

This model requires the following inputs for measuring the fair value of share-based awards:

  • Exercise price
  • Expected term
  • Expected volatility of the price of the share underlying the share-option award for the award’s expected term
  • Expected dividends on the share underlying the share-option award for the award’s expected term
  • The risk-free interest rate for the expected term
  • The current share price

Based on stakeholder feedback, the current share price is considered the most costly and complex input.

Updated Guidance

To determine the fair value of an equity-classified award at the grant date or upon a modification, the practical expedient allows a nonpublic entity to determine the current price of the underlying share using a value determined by the reasonable application of a reasonable valuation method. Below, more details illustrate how a current 409(a) would meet these criteria.

The determination of whether a valuation method is reasonable, or whether the application of a valuation method is reasonable, should be based on the facts and circumstances as of the measurement date.

As applicable, the following factors should be considered under a reasonable valuation method:

  • The value of tangible and intangible assets of the entity
  • The present value of anticipated future cash flows of the entity
  • The market value of stock or equity interests in similar entities engaged in trades or businesses substantially similar to those engaged in by the entity for which the stock is to be valued
  • Recent arm’s-length transactions involving the sale or transfer of stock or equity interests of the entity
  • Other relevant factors such as control premiums or discounts for lack of marketability and whether the valuation method is for other purposes that have a material economic effect on the entity, its stockholders, or its creditors
  • The entity’s consistent use of a valuation method to determine the value of its stock or assets for other purposes

The above factors mirror the characteristics in the regulations of the US Department of the Treasury related to Section 409A of the US Internal Revenue Code.

Section 409A allows for the use of any one of the following methods to meet the presumption of reasonableness requirements:

  • A valuation determined by an independent appraisal within the 12 months preceding the grant date
  • A valuation based on a formula that, if part of a nonlapse restriction with respect to the share, would be the share’s fair market value
  • A valuation made reasonably and in good faith and evidenced by a written report that considers the relevant factors of the illiquid stock of a start-up corporation

While not limited to the above methods, the practical expedient considers a valuation in accordance with Section 409A reasonable.

The use of a valuation method isn’t reasonable if that valuation method doesn’t consider all available information material to the value of the nonpublic entity. In addition, the use of a previously calculated value isn’t reasonable under the following conditions:

  • The value isn’t updated for any information available after the date of the calculation that may materially affect the value of the entity
  • The value was calculated more than 12 months earlier than the date for which the valuation is being used


Nonpublic entities that issue equity-classified share-based awards to both employees and nonemployees within the scope of Topic 718 can elect the practical expedient, which the entities should apply on a measurement-date-by-measurement-date basis.

This means the entities need to apply the practical expedient to all in scope share-based awards with the same underlying share and the same measurement date.

The practical expedient isn’t available for liability-classified awards.

Effective Dates

The practical expedient is effective prospectively for all qualifying awards granted or modified during fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

Early application, including application in an interim period, is permitted for financial statements that haven’t yet been issued or made available for issuance as of October 25, 2021.

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