Final Accounting Rules Related to Share Option Awards Being Drafted

On April 20, the Private Company Council (PCC) tentatively voted to draft final rules that would provide an inexpensive accounting workaround related to pricing equity-classified share option awards. The rules are designed to enable private companies that currently obtain two independent valuations—one for GAAP and one for tax requirements—to obtain just one to satisfy both purposes, thereby reducing costs. The rules would take effect prospectively for fiscal years beginning after December 15, 2021, and interim periods in the following year. Earlier application would be allowed. The proposal would provide a practical expedient on how to determine the current price input for an option pricing model used to calculate the “grant-date fair value of an equity-classified share-option award.” The PCC, which works with the FASB to develop guidance for private companies, will vote in June on the draft. Issuance of a final standard is subject to endorsement by FASB.

Private Companies Laud Decision to Drop Debt Classification Project

FASB’s recent decision to drop its project to simplify debt classification accounting rules was cheered by private companies. A company’s working capital and liquidity portrayal can negatively change by how it classifies debt, and many companies—particularly those in the retail and restaurant sectors—have been scrambling to stay afloat amid the COVID-19 pandemic. Debt classification is especially critical during these times. Many CPAs voiced their approval of the board’s decision to drop the proposals to the Private Company Council (PCC), the panel’s Chair Candace Wright said during April 20 discussions. “I received several emails praising ya’ll,” said Wright, a director with Postlethwaite & Netterville, a Louisiana-based accounting and business advisory firm. The PCC works with FASB to amend and issue U.S. GAAP for private companies, most of which have fewer resources and regularly press for simpler accounting rules.

Staff to Study SPACs with Respect to Profits Interest Compensation

FASB staff will research whether special purpose acquisition companies (SPAC) are generating issues that would fall within the range of guidance accounting rulemakers could ultimately draw up on reporting profits interest compensation. Decisions will be made by the Private Company Council in September on whether to add a project on profits interest, according to the panel’s April 20 discussions. Profits interest are equity-type compensation that are especially popular among limited liability companies (LLC) and partnerships. This type of compensation might fit within the framework of SPACs, known as blank check companies, formed to raise capital through an initial public offering (IPO) with the goal of acquisition. The SEC has been cracking down how SPACs are reported. The PCC has been researching profits interest since last year, forming a working group to study the topic with the goal of figuring out scope and potential accounting rules on the subject. “There’s a lot of emphasis on the scope regarding private equity, I was also curious whether or not staff has looked at whether the sponsors of SPACs may also be in that pool—that was one thing that came to my mind,” Holly Nelson, chief executive officer at Key Advisory Services, said. “It does appear that there is really going to be a service component associated with these profits interest and being able to provide clarity potentially may be helpful.”