Estimated reading time: 2 minutes

The article in brief:

• The AICPA’s working draft introduces meaningful updates across every chapter of the stock compensation guide.
• Private companies are encouraged to reassess their valuation methods as secondary transactions now carry greater weight in determining fair value.
• The draft addresses challenges and evolving best practices in allocating value between preferred and common equity for complex capital structures, with particular emphasis on enhancements to the Option Pricing Model (OPM) allocation technique.

The AICPA’s Financial Reporting Executive Committee recently released a complete working draft of its Valuation of Privately-Held-Company Equity Securities Issued as Compensation Accounting and Valuation Guide (Guide), commonly referred to as the Cheap Stock guide. VRC’s Adam Smith and Caroline Puiggali served on the Task Force that developed the Guide.

This is the first comprehensive refresh since 2013, introducing substantial changes across all sections. The working draft represents evolving best practice and should be considered for current and future transactions and valuations. Comments are due by June 1, 2026, and a final release date has not yet been announced.

Cheap Stock Guide Evolution

The Guide was first issued in 2004, establishing best practices for valuing private company stock for financial statement preparers, auditors, and valuation specialists to develop reasonable, supportable valuations to address the frequent disconnect between private company valuations preceding an IPO.

A significant update in 2013 incorporated accounting and tax changes (ASC 820, ASC 718, IRS §409A) along with advancements in valuation practices. Since then, the volume of secondary transactions and share repurchases has increased substantially. Research indicated that the values of common and preferred stock are more closely aligned than previously thought, prompting the AICPA to revisit existing guidance.

In June 2024, the AICPA released two chapters of the Guide for public comment: Chapter 8, Inferring Value from Transactions in a Private Company’s Securities, and Chapter 9, Selected Accounting and Disclosure Matters. This working draft consolidates prior feedback and introduces comprehensive updates throughout the entire Guide.

Key Updates & Enhancements

These updates represent the evolution of best valuation practices and changes to authoritative accounting guidance since the previous edition. The most notable revisions focus on value allocation within complex capital structures and the treatment of secondary transactions. The June release served as a foundational step, gathering feedback and laying the groundwork for the broader enhancements in this draft.

• Deeper focus on observable inputs, particularly secondary market inputs.
• Offers more robust, step-by-step guidance on evaluating transaction data.
• Introduces clearer, formally defined criteria for distinguishing orderly from non-orderly transactions. Notably, limited access to information does not automatically render a transaction non-orderly.
• Expands on the June release with a fully developed calibration framework, including adjustments for timing and differences in rights and preferences (e.g., liquidation and anti-dilution provisions).
• Enhances ASC 718 guidance for recognizing compensatory elements in secondary market transactions. Under ASC 718, a company repurchasing an equity award from a grantee should recognize any excess of the repurchase price over the award’s fair value as compensation. Under the draft, this guidance should also apply if the purchaser is a related party or an economic interest holder, which may include a new investor.
• Addresses current challenges in applying the OPM for allocation in complex capital structures.
• Discusses additional methodologies to the OPM that may be used to value equity securities in companies with complex capital structures.

VRC will publish additional thought leadership addressing these changes.

How VRC Can Help

Valuing private company stock can be complex and requires careful consideration of specific facts and circumstances. VRC’s dedicated team of valuation professionals leverages decades of experience, proven methodologies, and advanced analytics to deliver accurate, defensible, and transparent valuations. Contact the article’s authors or one of our VRC professionals to discuss how these updates may impact your approach.