The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The ASU is intended to clarify the guidance when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of the security; however, the broad principles of fair value measurement have not been changed.
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.
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 security’s fair value.
ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of an equity security (because it is a characteristic of the entity holding the equity security rather than a characteristic of the security) and is therefore not considered when measuring fair value in accordance with Topic 820. The ASU also clarifies that an entity cannot recognize and measure a contractual sale restriction as a separate unit of account.
The ASU introduces new disclosure requirements that would provide investors information about the contractual sale restrictions and the liquidity risk presented to an entity’s equity security investments, including:
- 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)
For public business entities, the amendments in ASU 2022-03 are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.
The amendments in the ASU should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption. However, an entity that qualifies as an investment company under Topic 946, Financial Services—Investment Companies, should apply the amendments to an investment in an equity security subject to a contractual sale restriction that is executed or modified on or after the date of adoption of the amendments. Investments in an equity security subject to a contractual sale restriction executed before the date of adoption of the amendments in the ASU should be accounted for using the accounting policy applied before adoption of the amendments.