On June 30th, the Financial Accounting Standards Board (FASB) published an Accounting Standards Update (ASU) that improves financial reporting for investors and other financial statement users. The ASU is designed to enhance comparability of financial information for all reporting entities with investments in equity securities measured at fair value and are subject to contractual restrictions preventing the sale of those securities.
Under Fair Value Measurement (Topic 820), reporting entities are advised to consider the characteristics of the asset or liability when measuring the fair value of an asset or a liability. This would include restrictions on the sale of the asset or liability should a market participant also consider those characteristics. The main determinant is the unit of account for the asset or liability being measured at fair value.
A number of investors indicated that Topic 820 contains inconsistent guidance on what the unit of account is when measuring the fair value of an equity security, resulting in differing practices concerning whether the effects of a contractual restriction that prevents the sale of an equity security should be considered in measuring that equity security’s fair value. In response to this feedback, the amendments in the ASU specify that a contractual restriction on the sale of an equity security is not part of the unit of account of the equity security, so it is not considered in measuring fair value.
New transparency requirements established in the ASU provide investors with information on the restriction, including the restriction’s nature and remaining duration.
For public companies, the amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early compliance is permitted for interim and annual financial statements that have not yet been issued or made available for issuance.