On February 6, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) updated Section 9520 of its Financial Reporting Manual regarding share-based compensation disclosures in initial public offering (“IPO”) prospectuses.  The updates revise prior SEC guidance recommending that issuers, in their disclosure of pre-IPO share-based compensation, include tabular disclosure (for the twelve-month period preceding the most recent balance sheet date) regarding the number of instruments granted, the exercise price, the fair value of the underlying stock and the fair value of instruments granted, as well as narrative disclosure describing the factors that contributed to significant changes in the fair value of the underlying stock during the relevant twelve-month period.  Updated Section 9520 no longer requires this level of detail.  Instead, the SEC Staff will consider, in assessing the adequacy of share-based compensation disclosure, whether the following critical accounting estimate disclosures are included in the company’s IPO prospectus:

• The methods that management used to determine the fair value of the company’s shares and the nature of the material assumptions involved.
• The extent to which the estimates are considered highly complex and subjective.

The SEC Staff also will not require the disclosure of estimates to determine the fair value of new awards once the underlying shares begin trading.

Updated Section 9520 also indicates that the SEC Staff may issue comments asking companies to explain the reasons for valuations that appear unusual.  These comments are intended to elicit analyses that the SEC Staff can review to assist it in confirming the appropriate accounting for the share-based compensation, not for the purpose of requesting changes to disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) or elsewhere in the company’s IPO prospectus.  In addition, updated Section 9520 indicates that the SEC Staff will consider other MD&A requirements related to share-based compensation, including known trends or uncertainties including, but not limited to, the expected impact on operating results and taxes.