FASB Issues Standard To Improve Fair Value Guidance for Equity Securities
The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2022-03, intended to improve financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.
FASB said ASC Topic 820, Fair Value Measurement, states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value, FASB stated.
Some stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.
To address this, the amendments in the ASU clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU introduces new disclosure requirements to provide investors with information about the restriction, including the nature and remaining duration of the restriction.
For public business entities, the standard is effective for fiscal years beginning after Dec. 15, 2023, and interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after Dec. 15, 2024.