What is fair value?
Fair value (not to be confused with fair market value) refers to the unbiased measurement of the potential market price of an asset, good or service. When applied to ASC 718, the meaning of fair value is narrowed down to the measurement of equity awards. The Financial Accounting Standards Board (FASB) requires that all equity awards granted to employees and non-employees be accounted for at fair value.
At Carta, the Black Scholes option pricing model is used to calculate fair value. The Black Scholes model has various fixed inputs and assumptions respected by market participants. This model is a commonly-used standard in the finance industry.
Fair Value in US GAAP
In a US GAAP scenario, the accounting methodology inputs used at setup will impact the treatment of various awards.
Mark-to-market awards will be remeasured on a tranche-by-tranche level, leading to fluctuations in the fair value of the award. A grant date award will have a more stable output for fair value, as the award is not being remeasured on a frequent basis.
Fair Value in IFRS:
In an IFRS scenario, the accounting methodology available during setup is more limited. The methodology used will remeasure every tranche individually, leading to an expected term that increases with every tranche. As expected term is one of the inputs for the Black Scholes model, this is a component that will inevitably affect fair value.
With an increasing expected term, the fair value for awards will also steadily increase.
