On April 30, the FASB’s Small Business Advisory Committee (SBAC) met to discuss whether the Private Company Council (PCC) should add the topic of stock plan accounting to their agenda. I listened to the whole discussion–even the parts that were hard to hear–so I figure I’m due a blog entry out of it.
Background
Some of you may recall that, back in February of last year, I blogged about the FASB forming a special group to review whether exceptions or modifications for private companies should be made to GAAP (“A Different Standard for Private Companies,” February 7, 2012). At the time, the name of the group was the Private Company Standards Improvement Council. It’s not quite clear how we got from there to here (maybe FASB didn’t like the fact that everyone would probably pronounce the acronym “pic-sic”), but the PCC seems to be the current iteration of that group.
The SBAC provides a forum for the small business community to share ideas, experiences, etc. with the FASB. The PCC is considering taking up the topic of stock plan accounting–specifically, should the requirements of ASC 718 be modified for private companies or should private companies be exempt from some of the requirements–and asked the SBAC to discuss whether this is a big enough issue for small companies that they (the PCC) should add it to their agenda.
The SBAC Discussion
The FASB, in preparation for the meeting, and the committee did identify a number of concerns for private companies, including:
Valuation of underlying stock and valuation of options can both be difficult and costly.
The required disclosures may be onerous for private companies.
It can be difficult for private companies to interpret and apply the relevant accounting principles without help from paid advisors and there are probably lots of tedious rules that private companies aren’t aware of.
It can be difficult for private companies to determine whether awards are subject to equity or liability treatment due to various redemption provisions that are often utilized by them (e.g., rights of first refusal, repurchase rights, etc.).
The accounting implications of awards issued by private companies don’t really become relevant until a CIC and equity awards could be viewed as a cost to the ultimate buyer, rather than a cost to the issuing company.
Despite these concerns, I was surprised to note that the SBAC wasn’t terribly sympathetic to the idea of carving out some exceptions for private companies. The committee seemed skeptical of how widespread usage of stock compensation is among private companies. Some committee members supported the idea of further research into the level of usage; other members simply didn’t believe that enough private companies offered stock compensation to make the topic worthy of the PCC’s time. Also, some committee members felt that because offering stock compensation is optional, those private companies that offer it should be prepared to devote the resources necessary to account for it correctly.
Interestingly, the committee seemed most concerned about the disclosures. This was a surprise to me because I didn’t think private companies even bothered with the disclosures, given that their financial statements aren’t filed with the SEC. The committee spent so much time talking about the disclosures that I started to think maybe it was a separate agenda item (it wasn’t–I checked). They suggested that for both small public companies and private companies it would be helpful if FASB provided more assistance related to the disclosures, including possibly providing a checklist of annual vs. quarterly and public vs. private disclosures. Coincidentally, in preparing for my session, “Alphabet Soup: 10-K, 10-Q, S-K, Where Does Your Stock Plan Info Go? And Why Should You Care?,” Carrie, Elizabeth, and I had just been discussing the confusion over what information companies are supposed to include in their quarterly disclosures.
The recording of the SBAC meeting is no longer available, but you can access the meeting handouts, which include some of the feedback from SBAC members.
With the impending Facebook IPO crowding out just about any other news in my Google alert these days, I’ve got private companies on my mind. I don’t have anything to add on the Facebook IPO, but there has been an interesting development recently relating to accounting standards for private companies.
Debate Rages Over Private Company Accounting There is apparently a heated debate in the accounting community (specifically between the Financial Accounting Foundation, which oversees the FASB, and the American Institute of Certified Public Accountants) over whether the FASB should have oversight of accounting standards for private companies. So much so that the AICPA put together the Blue-Ribbon Panel on Standard Setting for Private Companies (is that the BRPSSPC? what exactly is a blue-ribbon panel, anyway? I thought it was something related to 4H or maybe beer…) to evaluate the matter and make recommendations. In response to the panel’s recommendations, the FAF has proposed creating the Private Company Standards Improvement Council, which would review current US GAAP to determine whether exceptions or modifications should be made for private companies.
Any suggestions made by the PCSIC (is that pronounced “pic-sic”?) would be subject to approval by the FASB. The problem with this, however, is that the Blue-Ribbon Panel recommended creating a completely separate, independent entity that wouldn’t be beholden to the FASB. The AICPA seems to be vehemently opposed to any approach where the FASB still has authority over the standards for private companies, and has threatened to take their toys and go home to create their own standards setting authority if the FAF proceeds with its proposal. (See “AICPA Turns Up Volume on Call for Independent Board,” Matthew Lamoreaux, Journal of Accountancy, October 18, 2011.)
I have no idea what this might mean for how private companies account for stock compensation, but I can definitely think of a few things I’d like to change about ASC 718 if I were a private company. (Ok, heck, I can think of some things I’d like to change even if I were a public company. In fact, let’s just scrap the whole standard.) It does surprise me that when the rest of the world seems to be focused on convergence, we are actually considering bifurcating our accounting standards here in the U.S. Kind of seems like the wrong direction…
Why Can’t Public Companies Do This?
Now, I imagine some of you that work for public companies are thinking: “Hey! Wait a minute here. If private companies can ignore the FASB and create their own standards setting organization, why can’t we?” Private companies can do this because, for the most part, their financial statements aren’t filed with the SEC, which requires the statements to be prepared in accordance with GAAP as determined by the FASB. Since private companies don’t file their financial statements with the SEC, they don’t have to follow the SEC’s rules (at least with respect to financial statements–there are other securities laws they still have to comply with, more on this in a future blog). And, other than the authority vested in FASB by the SEC, there’s no law that says that FASB is the supreme ruler of GAAP. So private companies can do whatever they want with their financial statements, so long as any investors and lenders that might want to review their financials are willing to accept them. Public companies, however, are still stuck with the FASB, unless you can somehow convince the SEC to let you do what you want, too. Good luck with that.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Across my desk this week came highlights from the NCEO’s recent survey on equity compensation in private companies. The NCEO says that the survey was intended to cover a wider range of closely held companies and to look at granting practices not just to executives, but to all employees. For this week’s blog, I share a snapshot of the survey results.
Demographics
201 companies and 32 service providers completed the survey. The large majority of participating companies (81%) have been in business for 5 years or more. Over half the respondents (56%) indicated their likely exit strategy would be a sale to another firm; only 10% are planning an IPO. A wide demographic was represented, with 42% of respondents representing biotech, software or other technology industries; 16% in professional services; 12% in manufacturing; and 30% in other industries. Seventy-two percent (72%) of the companies have outside venture or angel capital investors.
Plan Operations
Over half the participating companies use an outside administrative firm for administering their stock plan(s). The rest use a variety of approaches for stock plan administration. 47% of respondents use an outside appraiser to value the company’s shares. Twenty percent (20%) rely on their board to determine stock value, using the assistance of outside professionals.
Equity Distribution
Nearly all of the responding companies give at least some of their C-level employees equity; 77% of the companies give equity to all of their C-level employees. Most companies give C-level employees and senior management grants on hire, but only 44% of supervisory employees and 29% of hourly/non-supervisory employees receive grants. About half of the companies make occasional or periodic grants to eligible employees. C-level executives receive an average of 56% of the awards; other management receives an average of 19%, supervisory and technical 12% and hourly/non-supervisory 4%. Two-thirds of the companies utilize stock options, whereas restricted stock was far less common, at just 29%. Phantom stock, stock appreciation rights and restricted stock units are all used by less than 10% of the companies. The mean percentage of equity held by non-founders through awards is 15%.
More Information
The survey seems to capture feedback from a broad representation of closely held companies, with representation from both small and large companies, as well as demographics in multiple industries. Additional highlights of the survey can be found in our Private and Pre-IPO portal. The complete survey results are available for purchase from the NCEO. NASPP members who wish to purchase the survey are eligible for the NCEO member price ($150 vs. $250 for non-members). To take advantage of this pricing, enter the discount code SURVEY during checkout.
I look forward to seeing many of you at the 19th Annual NASPP Conference in San Francisco next week!