Tax Reporting

Stock Compensation

Regulation

Equity

Equity Compensation Valuation (IRC 409A/ASC 718)

The valuation of equity as compensation is a requirement for tax reporting, Internal Revenue Code 409a, and financial reporting, per FASB ASC 718 – Compensation – Stock Compensation.

Equity Compensation (IRC 409A and FASB ASC 718)

The task for the valuation professional is to provide an opinion of value of a class of equity of a business enterprise.

To meet the applicable tax and financial reporting guidance, a valuation of the underlying business if oftentimes required before determining a value for the specific class of equity.  Analyses for companies with multiple classes of equity can be more complex. In occasions where a business has recently raised capital from independent sources, it may be prudent to use the funding transaction as a proxy for the value of the equity.

Audit and tax professionals refer their clients to Marshall & Stevens for this service because our work stands up to the scrutiny of regulators and meets the applicable audit requirements.

Other questions to ask include:

  • Is your board or tax advisor concerned that the IRS would interpret the data differently and derive a different value for the options?
  • Did an independent third-party expert determine the fair value (as required by FASB ASC 718 and IFRS 2) and fair market value (as required by IRC 409A) of the common equity or was a “market price” or “recent” transaction price used?
  • Was the value determined using a Black Scholes option pricing model or a binomial lattice model?How were the inputs derived for the model?
  • When valuing common equity, have you properly considered the rights and restrictions of the securities senior to the common, such as the preferred equity tranches and debt?
  • How can your company benefit from an analysis performed for compliance purposes?

One must keep in mind that the IRS has increased the penalty for reliance on a faulty valuation analysis. The person and firm that provides an analysis that plays a material role in a tax filing, personal or corporate, is considered an unsigned tax preparer. If the IRS determines the work relied upon by the filer was not performed properly, the person and firm can be cited and charged. Remember, the IRS has hindsight on its side if it decides to audit your reports.

MANAGING A SHARE-BASED COMPENSATION STRATEGY

FASB ASC 718 and IFS 2 establish standards for the accounting of share-based compensation and transaction strategies. Whether you are starting to develop and integrate a share-based strategy into your company’s plan or have an existing strategy, a defendable, well-contemplated valuation is essential for the proper outcome and execution.

For more information on this or other services, please contact one of the professionals listed below:

Equity Compensation Valuation Contacts

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