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Journal Entry — AICPA Issues Accounting and Valuation Guide on “Cheap Stock”

Published on: Jun 04, 2013

The AICPA has issued a new Accounting and Valuation Guide, Valuation of Privately Held Company Equity Securities Issued as Compensation

The guide addresses challenges encountered by private companies when valuing equity securities issued as compensation (“cheap stock”) by providing practical guidance on and examples of the valuation, accounting, and disclosures of such securities. As noted on the AICPA’s Web site, the guide includes discussions of the following:

  • “Evaluating private and secondary market transactions — What should companies do when transaction activity doesn't match their estimates of value?
  • Adjustments for control and marketability — How should companies think about the value of the enterprise for the purpose of valuing minority securities? When is it appropriate to apply a discount for lack of marketability, and how should the estimated discount be supported?
  • Highly leveraged entities — How should companies incorporate the fair value of debt in the valuation of equity securities? What is the impact of leverage on the expected volatility of various securities?
  • The relevance of ASC 820 (SFAS 157) to cheap stock issues
  • Updated guidance and illustrations regarding the valuation of, and disclosures related to, privately held company equity securities issued as compensation.”

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