Alert

Proposed Improvements to Fair Value Guidance for Restricted Equity Securities

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The Financial Accounting Standards Board (FASB) issued proposed Accounting Standards Update (ASU), Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions on September 15, 2021.

The proposed ASU would amend the guidance and certain illustrative examples in Topic 820, Fair Value Measurement, to clarify that a contractual restriction on the sale of an equity security isn’t considered part of the unit of account of the equity security and, as such, wouldn’t be considered in measuring the fair value of the equity security.

Comments on the proposed ASU are due by November 14, 2021.

Key Provisions

Determining the unit of account is a key consideration when measuring the fair value of an asset or liability under Topic 820.

Topic 820 currently contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security with a contractual sale restriction that prohibits the sale of the equity security—often referred to as a lock-up agreement or a market standoff agreement.

Current Guidance

In certain paragraphs of Topic 820, the guidance indicates that the unit of account is an individual equity security—exclusive of the contractual sale restriction. In accordance with this guidance, it wouldn’t be appropriate under the principals of Topic 820 to adjust the fair value of the restricted equity security by applying a discount to the price of an identical equity security that isn’t subject to a contractual sale restriction.

In contrast, an illustrative example within Topic 820 that addresses restricted equity securities indicates that a contractual sale restriction would be considered a characteristic of that equity security and, therefore, included within the unit of account.

In this case, applying a discount to the price of an identical equity security that isn’t subject to a contractual sale restriction would be appropriate when measuring the fair value of the restricted equity security.

Proposed Guidance

To reduce the diversity in practice, the proposed amendments clarify that a contractual restriction that prohibits the sale of an equity security:

  • Isn’t a characteristic of the equity security
  • Should be excluded from the unit of account

The guidance further clarifies that the fair value of an equity security subject to a contractual sale restriction:

  • Should be measured on the basis of the market price of the same equity security without the contractual sale restriction
  • Shouldn’t be adjusted or discounted to reflect the reporting entity’s inability to sell the equity security on the measurement date

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For more information on how the proposed amendments could affect your business, contact your Moss Adams professional.

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