FASB Says Closely Held Companies Can Choose Intrinsic Value or Fair Market Value of Equity Compensation

At a November 11 meeting, the Financial Accounting Standards Board (FASB) tentatively proposed that, when accounting for equity compensation awards, closely held companies be able to choose between the intrinsic value method for accounting (the approach now being used by almost all closely held companies) or the fair value method (the method that would require equity awards to be expensed based on an assessment of their present value at the time of grant). While companies could choose either method, FASB said that the fair value method would be the "preferred" approach.

While the proposal may seem to be a significant concession to closely held companies, the intrinsic method would require companies to use variable accounting under APB 25, which means they would have to adjust their expenses to reflect changes in the value of the options. For most closely held companies, this would not be an improvement over expensing at fair value.