Valuation Services – Cheap Stock and Share-Based Stock Compensation

Summary

The Financial Accounting Standards Board (“FASB”) issued an update to ASC 718-09, Compensation – Stock Compensation (“ASC 718”), in May 2017. The ASC 718 update primarily relates to the incorporation of modification accounting with the topic. The update to ASC 718 is available here and took full effect for all entities (public and private) for annual periods, and interim periods within those annual periods, beginning after December 15, 2017.

Let this alert be a friendly reminder to CFOs, controllers, and other accounting team members that in the event of a form of stock compensation, engaging an independent appraiser like Centri Valuation Services is critical. Some of the consequences of not having a valuation prepared include: delayed and more expensive audit opinions, incorrect financial statements that will need to be revised, and delayed IPO timing – as firms often have to retrospectively value share compensation and have their auditors review the valuation. Rather than having these issues pop up at inopportune times, be proactive, and have your share-based payments valued shortly after they are awarded.

Centri Valuation Services has been engaged in these type of ‘catch-up’ scenarios, i.e. performing valuations for stock based compensation that were awarded in the past, and we are happy to assist your firm if it is in that situation currently. However, these periods – completing audits, issuing financials, preparing for IPO – are already very stressful and difficult. Follow up with Centri Valuation Services to prevent unnecessary burdens to your accounting and management teams.

The update to ASC 718 will affect events and transactions such as:

  • Short-term inducements
  • Equity restructuring or business combination
  • Repurchase or cancellation
  • Cancellation and replacement

It is crucial for private companies to establish the fair market value (“FMV”) before issuing share-based payments. FMV for private companies must be established in accordance with Internal Revenue Code 409A (“IRC 409A”) which provides safe harbor to companies that have obtained a valuation from an independent appraiser.

IRC 409A applies to nonqualified deferred compensation. IRC 409A application includes, but is not limited to:

  • Nonqualified retirement plans
  • Elective deferrals of compensation
  • Severance and separation programs
  • Stock options
  • Other equity incentive programs
  • Reimbursement agreements

How Centri Can Help

Deferred compensation plans are intended to provide significant benefits to both the employers, who offer the plans, and the employees, who receive them. When a private company issues stock-based compensation to employees prior to conducting a 409A analysis, both the employer and employee are hit with the adverse consequences. Don’t get caught off guard; utilize Centri Business Consulting’s valuation experts to ensure your business is compliant with IRC 409A before awarding deferred compensation.

Centri has expertise in performing ASC 718 valuations for companies of various sizes, business stages and industries. We have assisted pre-revenue private companies as well as mature large publicly traded companies and all sizes in between. Our valuation experts have served clients in a myriad of industries including but not limited to manufacturing, life sciences, biotechnology, real estate, financial services, healthcare, education and many more. Regardless of your company’s size or industry, the valuation experts at Centri Business Consulting will be able to competitively and expeditiously fulfill any ASC 718 engagement your business may need.

We Can Assist with the Following Valuation Services:

  • Embedded Derivatives or Bifurcation of Convertible Securities (ASC 815)
  • Equity-Based Compensation (IRC 409A/ASC 718)
  • Fair Value Measurements (ASC 820)
  • Financial Assets & Liabilities
  • Fresh Start Accounting
  • Gift and Estate Tax
  • Goodwill & Other Intangibles Impairment Analysis (ASC 350)
  • Purchase Price Allocations Related to Business Combinations (ASC 805)
  • Private Equity Portfolios
  • Variable Interest Entities

About Centri Business Consulting, LLC

Centri Business Consulting provides the highest quality finance and accounting consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reporting, internal controls, technical accounting research, valuation, and CFO advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skill sets to ensure the project is completed timely and accurately.

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