On August 10, 2012, the AICPA issued a working draft of a new chapter of the AICPA Accounting and Valuation Guide Valuation of Privately Held Company Equity Securities Issued as Compensation. The new chapter- chapter 8, Inferring Value from Transactions in a Private Company’s Securities – provides a framework on how to evaluate private transactions and secondary market transactions and their relevance for estimating fair value of the other securities within an enterprise. This new chapter was developed in response to feedback received on the working draft of the guide, which was originally released in March of 2011.
In a private or secondary market transaction, estimating fair value will depend on the facts and circumstances and may require the use of significant judgment about how to appropriately utilize information from individual transactions. Because these transactions may include multiple value drivers or strategic components, it is necessary to consider the specific transaction dynamics in understanding their relevance for estimating fair value. In many cases, it may be possible to use the price from a transaction to solve for the total equity value and the value of the other securities within the enterprise. In other cases, adjustments to the prices observed in a transaction may be needed.
Along with the new chapter, the AICPA also released the latest working draft of the guide in order to provide context for the new chapter and to solicit feedback on the fifteen new questions and answers (Q&As) in chapter 12 of the guide. These Q&As were added subsequent to the guide’s original release to clarify the points where there was most confusion in practice.
The new Q&As that have been added to chapter 12 discuss issues related to the valuation of debt, the impact of estimating equity value using the fair value of debt, valuing equity securities in complex capital structures, and control and marketability issues surrounding the estimation of total enterprise value and specific equity values.
The AICPA is looking for feedback on the working draft of the new chapter and Q&As 12.1-12.15 of the guide by October 1, 2012.