The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2022-03, which amends Topic 820 (Fair Value Measurement) and helps clarify how entities should value and disclose investments in equity securities measured at fair value that are subject to a contractual sale restriction. This update did not change the principles of fair value measurement in ASC 820.
Prior to this ASU, there was conflicting guidance that resulted in a diversity in practice as to 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.
The ASU helps clarify when a discount should be applied to the fair value of an equity security by understanding whether there is an entity specific restriction or an equity security with an asset specific restriction. If there is an entity specific restriction, this is a characteristic of the holder of the equity security rather than a characteristic of the equity security itself, and therefore, should not be considered in measuring the equity security’s fair value. If there is an equity security with an asset specific restriction, that restriction is included in the equity security’s unit of account and should be considered in the measurement of the fair market value.
The ASU also provided guidance on the following disclosures for equity securities subject to contractual sale restrictions that should be made:
- The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet
- The nature and remaining duration of the restriction(s)
- The circumstances that could cause a lapse in the restriction(s)
Equity securities restricted from sale because they are pledged as collateral and included in disclosures required by other topics should not be included in guidance for the ASU note above.
These clarifications resulting from the ASU should help entities understand when they are required to apply a discount on the fair values of equity securities and when it would not be needed.
The amendments in this update will be effective for public business entities for fiscal years beginning after December 15, 2023 and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2024 and interim periods within those fiscal years. Early adoption will be permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.
We would be pleased to provide further information related to this subject matter. For more information, contact Frank Varanavage, Manager, Investment Industry Group at fvaranavage@kmco.com.
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