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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations complete and comparable financial information.
FASB ASC Topic 718 addresses a wide range of share-based compensation arrangements including share options, restricted share plans, performancebased awards, share appreciation rights, and employee share purchase plans.
FASB ASC Topic 718 replaced guidance originally issued in 1995 that established as preferable, but did not require, a fair-value-based method of accounting for share-based payment transactions with employees. It also replaced guidance originally issued in 1996 that provided different recognition and measurement requirements for share-based payment awards granted to nonemployees than for those granted to employees.
The staff believes the guidance in this SAB will assist issuers in their application of FASB ASC Topic 718 and enhance the information received by investors and other users of financial statements, thereby assisting them in making investment and other decisions.
This SAB includes interpretive guidance related to the transition from nonpublic to public entity 2 status, valuation methods including assumptions such as expected volatility, expected term, and current price of the underlying share, particularly when valuing spring-loaded awards 3, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, and capitalization of compensation cost related to share-based payment arrangements.
The staff recognizes that there is a range of conduct that a reasonable issuer might use to make estimates and valuations and otherwise apply FASB
ASC Topic 718, and the interpretive guidance provided by this SAB. Thus, throughout this SAB the use of the terms reasonable and reasonably is not meant to imply a single conclusion or methodology, but to encompass the full range of potential conduct, conclusions or methodologies upon which an issuer may reasonably base its valuation decisions. Different conduct, conclusions or methodologies by different issuers in a given situation does not of itself raise an inference that 2 Defined
in the FASB ASC Master Glossary.
share-based payment award granted when a company is in possession of material nonpublic information to which the market is likely to react positively when the information is announced is sometimes referred to as being spring-loaded. The interpretive guidance included in this SAB with respect to spring-loaded share-based payment awards is not limited to share options, and applies to all instruments including, for example, restricted stock units.

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any of those issuers is acting unreasonably. While the zone of reasonable conduct is not unlimited, the staff expects that it will be rare, except when observable market prices of identical or similar equity or liability instruments in active markets are available, when there is only one acceptable choice in estimating the fair value of share-based payment arrangements under the provisions of FASB ASC Topic 718 and the interpretive guidance provided by this SAB in any given situation. In addition, as discussed in the Interpretive Response to Question 1 of Section C, Valuation Methods, estimates of fair value are not intended to predict actual future events, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made under FASB ASC Topic 718.

A. Removed by SAB 120
B. Transition From Nonpublic to Public Entity Status Facts: Company A is a nonpublic entity 4 that first files a registration statement with the SEC to register its equity securities for sale in a public market on January 2, 20X8. As a nonpublic entity, Company A had been assigning value to its share options 5
under the calculated value method prescribed by FASB ASC Topic 718, CompensationStock Compensation,6
and had elected to measure its liability awards based on intrinsic value.
Company A is considered a public entity on January 2, 20X8 when it makes its initial filing with the SEC in preparation for the sale of its shares in a public market.
Question 1: How should Company A
account for the share options that were granted prior to January 2, 20X8 for which the requisite service has not been rendered by January 2, 20X8?
4 Defined
in the FASB ASC Master Glossary.
purposes of this staff accounting bulletin, the phrase share options is used to refer to share options or similar instruments.
6 FASB ASC paragraph 718103020 requires a nonpublic entity to use the calculated value method when it is not able to reasonably estimate the fair value of its equity share options and similar instruments because it is not practicable for it to estimate the expected volatility of its share price.
FASB ASC paragraph 718105551 indicates that a nonpublic entity may be able to identify similar public entities for which share or option price information is available and may consider the historical, expected, or implied volatility of those entities share prices in estimating expected volatility. The staff would expect an entity that becomes a public entity and had previously measured its share options under the calculated value method to be able to support its previous decision to use calculated value and to provide the disclosures required by FASB ASC subparagraph 71810502f2ii.
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Interpretive Response: Prior to becoming a public entity, Company A
had been assigning value to its share options under the calculated value method. The staff believes that Company A should continue to follow that approach for those share options that were granted prior to January 2, 20X8, unless those share options are subsequently modified, repurchased or cancelled.7 If the share options are subsequently modified, repurchased or cancelled, Company A would assess the event under the public company provisions of FASB ASC Topic 718. For example, if Company A modified the share options on February 1, 20X8, any incremental compensation cost would be measured under FASB ASC
subparagraph 71820353a, as the fair value of the modified share options over the fair value of the original share options measured immediately before the terms were modified.8
Question 2: How should Company A
account for its liability awards granted prior to January 2, 20X8 that are fully vested but have not been settled by January 2, 20X8?
Interpretive Response: As a nonpublic entity, Company A had elected to measure its liability awards subject to FASB ASC Topic 718 at intrinsic value.9
When Company A becomes a public entity, it should measure the liability awards at their fair value determined in accordance with FASB ASC Topic 718.10 In that reporting period there will be an incremental amount of measured cost for the difference between fair value as determined under FASB ASC
Topic 718 and intrinsic value. For example, assume the intrinsic value in the period ended December 31, 20X7
was $10 per award. At the end of the first reporting period ending after January 2, 20X8 when Company A
becomes a public entity, assume the intrinsic value of the award is $12 and the fair value as determined in accordance with FASB ASC Topic 718
is $15. The measured cost in the first reporting period after December 31, 20X7 would be $5.11
Question 3: After becoming a public entity, may Company A retrospectively 7 This view is consistent with the FASBs basis for rejecting full retrospective application of FASB ASC
Topic 718 as described in the basis for conclusions of Statement 123R, paragraph B251.
8 FASB ASC paragraph 718205594. The staff believes that because Company A is a public entity as of the date of the modification, it would be inappropriate to use the calculated value method to measure the original share options immediately before the terms were modified.
9 FASB ASC paragraph 71830302.
10 FASB ASC paragraph 71830353.
11 $15 fair value less $10 intrinsic value equals $5
of incremental cost.

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