Revised Guidance from AICPA on Valuing Privately-Held Stock
Following a decade since the issuance of FASB ASC 718 (SFAS 123R) and the AICPA’s initial guidance on valuing privately-held securities, a new guide with significant revisions has been developed by the Equity Securities Task Force and released by the AICPA. It offers guidance and illustrations related to accounting, disclosures, and valuations of privately held company equity securities issued as compensation.
There are a number of material modifications and additions to the original guide issued in 2004. Among the more salient and significant to those concerned with valuations of illiquid stock are:
• What considerations are relevant to evaluating private and secondary market transactions in the same or similar securities? How to correlate outcomes differing from fundamental approaches? (see Chapter 8)
• What factors are material to making adjustments for control/minority interests and lack of marketability? What are the cogent arguments to support selected discounts? (see Chapter 7)
• How should highly leveraged companies integrate the fair value of debt in the valuation of stock? (see Chapter 6)
• The relevance of ASC 820 (SFAS 157) to cheap stock issues determined from application of ASC 718.
Significant changes for valuation providers
While the professional valuation community has been aware of many of the incorporated changes for some time (the guide was in draft for four years), issuers and others dealing with private securities valuations may find many of the precepts in the new guide radically different from prior guidance…and current practice.
Among other impacts, it is probable that the guide will result in more weighting being given to relevant transactions in similar securities. That means it will be increasingly difficult to minimize the impact of secondary market transactions (such as on SharesPost or SecondMarket) and preferred stock issues on valuations performed for IRC 409a or ASC 718 or 820.
John Heath is Executive Vice President, Valuations & Financial Advisory Services of The Brenner Group. John joined The Brenner Group® in 1994 and manages the firm’s Valuations and Financial Advisory Services Groups. John has more than thirty-five years of experience in corporate finance, and has assisted more than 600 companies with financing, public underwritings, mergers, acquisitions, and valuations. Prior to joining The Brenner Group, John held executive management positions at Smith Barney, The First National Bank of Chicago, and Price Waterhouse. He received an MBA in Finance from The Wharton School of Business, and a BA degree from the University of Pennsylvania. John is a member and Accredited Senior Appraiser of the American Society of Appraisers and a member of the Appraisal Issues Task Force.
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