The implementation of IRC 409A (effective January 1, 2008) requires the strike price of stock options and stock appreciation rights to be at least equal to the fair market value of the underlying stock—or the company could incur significant tax as well as penalties. FAS 123R, which has been around since 2005, requires private entities to expense compensation-related stock options at fair value. Thus, a company’s tax need (under 409A) and financial reporting need (under 123R) could create inconsistent stock valuations—and private equity firms may be particularly vulnerable to any conflicts, given the significant changes in equity values their portfolio companies often experience.
Or consider the audience for these appraisals: While the IRS is comfortable with marketability and other discounts, the SEC is oriented toward rules for financial reporting. The company’s auditor understands the need for a credible report, while the Board of Directors may display varying levels of financial sophistication; the ultimate recipient wants a relatively low but risk-free value, while potential acquirers may be looking for a liability.
How to reconcile the different methodologies and meet all the company’s needs? Tune into today’s telephone conference, “409A Compliance—Issues, Approaches and Mistakes Not to Make,” featuring Bob Duffy, Scott Beauchene, and Joel Johnson. There’s still time to register by clicking here.
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