Proposal: Fair value measurement of certain equity securities

Sep 19, 2021
Audit Debt & equity Financial reporting

There currently is 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. Some financial statement preparers apply a discount to the price of an identical equity security that is not subject to a contractual sale restriction. Others consider the application of a discount to be inappropriate under the principles of Topic 820 of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification, “Fair Value Measurement.”

To address this practice issue, on September 15, 2021, the FASB issued a proposed Accounting Standards Update (ASU), Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. If finalized as proposed, this ASU would 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. Rather, an entity must measure the fair value on the basis of the price in the market based on the value of the same equity security that is not subject to a contractual sales restriction.

The effective date of this clarification will be determined after the FASB considers feedback on the proposed ASU. The proposed ASU is available for comment until November 14, 2021.