Value of Shares Released for Financial Statement Purposes (AICPA SOP 93-6)

[SRM]

Assume a private company with a leveraged ESOP that is valued by an independent third party once each year (as of the end of the year). Assume that all shares acquired by the ESOP were acquired after 1992.

How is the value of shares released in a year determined for company Financial Statement purposes?

I believe that AICPA SOP 93-6 indicates that the actual fair market value of the shares at the time of the release should be used for this purpose.

How is the fair market value determined if the Financial Statements are prepared prior to the completion of the valuation by the independent third party? Is the share value from the prior year used?

[BeckyMiller]

Greetings - this is not an authoritative document. I have to say that, because if you look at the last page of SOP 93-6, you will find my name.

This issue was specifically addressed in the development of the statement. We knew that most ESOPs were sponsored by private companies. If you look at paragraph 20 of the SOP, you will see that the reference is to the average value, not year-end value. Further, you will see that it refers to value as estimated by management. The auditor is then directed to test that estimate based upon information available, which may include a valuation report dated within 12 months of the statement.

It is common that financial statements include estimates. This is one of them and the auditor has to test that estimate for reasonableness. If the guess is WAY off, there may be adjustments in the following year. But, because it is always the average value, not the year end value, it has to be really, really off for that to be material.

Now, be advised that the FASB is working on a project to reconsider the measurement of fair market value. When finished that new standard may impact this provision. But, my guess is that this standard won't be coming out in the near future.

Hope this helps. FYI, this kind of question may be better posed to the AICPA helpline, than this forum.