As part of its simplification initiative, the Financial Accounting Standards Board last March issued new stock-based compensation guidance. The update provides private companies, when granting stock to employees, with a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value.
In contemplating whether to make such an election, companies should be mindful that not all valuation methodologies are created equal. Most importantly, while the option to value share-based awards using the current value method (CVM) is a relatively easy choice to make, compared with other methods it will understate the impact of options on the value of a companys common shares.