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Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
apply the fair-value-based method to its awards that were granted prior to the date Company A became a public entity?
Interpretive Response: No. Before becoming a public entity, Company A
did not use the fair-value-based method for either its share options or its liability awards. The staff does not believe it is appropriate for Company A to apply the fair-value-based method on a retrospective basis, because it would require the entity to make estimates of a prior period, which, due to hindsight, may vary significantly from estimates that would have been made contemporaneously in prior periods.12
Question 4: Upon becoming a public entity, what disclosures should Company A consider in addition to those prescribed by FASB ASC Topic 718? 13
Interpretive Response: In the registration statement filed on January 2, 20X8, Company A should clearly describe in MD&A the change in accounting policy that will be required by FASB ASC Topic 718 in subsequent periods and the reasonably likely material future effects.14 In subsequent filings, Company A should provide financial statement disclosure of the effects of the changes in accounting policy. In addition, Company A should consider the requirements of Item 303b3 of Regulation SK regarding critical accounting estimates in MD&A.

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C. Valuation Methods FASB ASC paragraph 71810306
CompensationStock Compensation Topic indicates that the measurement objective for equity instruments awarded to grantees is to estimate at the grant date the fair value of the equity instruments the entity is obligated to issue when grantees have delivered the good or rendered the service and satisfied any other conditions necessary to earn the right to benefit from the instruments.15 The Topic also states that observable market prices of identical or similar equity or liability instruments in active markets are the best evidence of fair value and, if available, should be used as the basis for the measurement for equity and liability instruments awarded in a share-based payment transaction.16 However, if observable 12 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.
13 FASB ASC Section 7181050.
14 See Item 303 of Regulation SK.
15 FASB ASC paragraph 71810301 states that this guidance applies equally to awards classified as liabilities.
16 FASB ASC paragraph 718105510.

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market prices of identical or similar equity or liability instruments are not available, the fair value shall be estimated by using a valuation technique or model that complies with the measurement objective, as described in FASB ASC Topic 718.17
Question 1: If a valuation technique or model is used to estimate fair value, to what extent will the staff consider a companys estimates of fair value to be materially misleading because the estimates of fair value do not correspond to the value ultimately realized by the grantees who received the share options?
Interpretive Response: The staff understands that estimates of fair value of share options, while derived from expected value calculations, cannot predict actual future events.18 The estimate of fair value represents the measurement of the cost of the grantees goods or services to the company. The estimate of fair value should reflect the assumptions marketplace participants would use in determining how much to pay for an instrument on the fair value measurement date.19 For example, valuation techniques used in estimating the fair value of share options may consider information about a large number of possible share price paths, while, of course, only one share price path will ultimately emerge. If a company makes a good faith fair value estimate in accordance with the provisions of FASB ASC Topic 718 in a way that is designed to take into account the assumptions that underlie the instruments value that marketplace participants would reasonably make, then subsequent future events that affect the instruments value do not provide meaningful information about the quality of the original fair value estimate. As long as the share options were originally so measured, changes in a share options value, no matter how significant, subsequent to its grant date do not call into question the reasonableness of the grant date fair value estimate.
Question 2: In order to meet the fair value measurement objective in FASB
ASC Topic 718, are certain valuation techniques preferred over others?
Interpretive Response: FASB ASC
paragraph 718105517 clarifies that the Topic does not specify a preference for a particular valuation technique or 17 FASB

ASC paragraph 718105511.
18 FASB ASC paragraph 718105515 states, The fair value of those instruments at a single point in time is not a forecast of what the estimated fair value of those instruments may be in the future.
19 Generally, the grant date for equity awards or the reporting date for liability-classified awards.

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model. As stated in FASB ASC
paragraph 718105511 in order to meet the fair value measurement objective, a company should select a valuation technique or model that a is applied in a manner consistent with the fair value measurement objective and other requirements of FASB ASC Topic 718, b is based on established principles of financial economic theory and generally applied in that field and c reflects all substantive characteristics of the instrument except for those explicitly excluded by FASB ASC Topic 718.
The chosen valuation technique or model must meet all three of the requirements stated above. In valuing a particular instrument, certain techniques or models may meet the first and second criteria but may not meet the third criterion because the techniques or models are not designed to reflect certain characteristics contained in the instrument. For example, for a share option in which the exercisability is conditional on a specified increase in the price of the underlying shares, the Black-ScholesMerton closed-form model would not generally be an appropriate valuation model because, while it meets both the first and second criteria, it is not designed to take into account that type of market condition.20
Further, the staff understands that a company may consider multiple techniques or models that meet the fair value measurement objective before making its selection as to the appropriate technique or model. The staff would not object to a companys choice of a technique or model as long as the technique or model meets the fair value measurement objective. For example, a company is not required to use a lattice model simply because that model was the most complex of the models the company considered.
Question 3: In subsequent periods, may a company change the valuation technique or model chosen to value instruments with similar characteristics? 21
Interpretive Response: As long as the new technique or model meets the fair value measurement objective as described in Question 2 above, the staff would not object to a company changing its valuation technique or model.22 A
20 See FASB ASC paragraphs 718105516 and 718105520.
21 FASB ASC paragraph 718105517 indicates that an entity may use different valuation techniques or models for instruments with different characteristics.
22 The staff believes that a company should take into account the reason for the change in technique or model in determining whether the new
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