Alert

Improvements to Fair Value Guidance for Restricted Equity Securities

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.

The ASU amends 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, therefore, isn’t considered in measuring the fair value of the equity security.

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

Certain sections of the guidance currently indicate 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.

Updated Guidance

To reduce diversity in practice, the 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 a restricted equity security:

  • 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

Disclosure

The amendments require the following disclosures for equity securities subject to contractual sale restrictions.

  • Fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet
  • Nature and remaining duration of the restriction
  • Circumstances that could cause a lapse in the restriction

Effective Dates

For public business entities, the amendments are effective 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 is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.

Transition Method

For all entities except investment companies as defined under Topic 946, Financial Services—Investment Companies, the amendments should be applied prospectively.

Entities that qualify as an investment company under Topic 946 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.

We’re Here to Help

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

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