Noteworthy Development: AICPA Drafts Update to Practice Aid on Valuations of Private Equity

The AICPA recently issued a working draft of its Practice Aid, Valuation of Privately Held Company Equity Securities Issued as Compensation which is an update to the original 2004 Practice Aid.  Commonly referred to as the “Cheap Stock” Practice Aid, the update provides non-authoritative, best practice guidance for the valuation of privately held equity securities issued as compensation.  

The draft of the new practice aid is substantially similar to the original, but contains updated information consistent with FASB ASC 820, Fair Value Measurements and Disclosures (formerly FAS 157) and FASB ASC 718, Stock Compensation and FASB ASC 505-50, Equity-Based Payments to Non-Employees (both formerly FAS 123(R).  In addition, the AICPA’s updated guidance reflects the evolution of valuation best practices and it includes changes relating to other GAAP and SEC developments.

The new and/or expanded guidance covers topics such as;

  • The fair value of debt for the purpose of valuing equity
  • Controlling versus minority interests
  • Marketable versus nonmarketable interests
  • The back-solve method under the market approach
  • Clarifications to the probability weighted expected return method and the options pricing model
  • Harmonization of disclosures for contemporaneous and retrospective valuations

The AICPA is accepting comments on the working draft until May 31, 2011, and anticipates issuing the final practice aid before year end.  The working draft is available at the following link.

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