FASB Proposes Clarifications to Fair Value Measurement Guidance
Overview
On September 15, 2021, the FASB issued a proposed ASU1 that would clarify the guidance in ASC 8202 related to the fair value measurement of an equity security subject to
contractual sale restrictions. Under the proposal, a contractual restriction on
the sale of an equity security would not be treated as part of the equity
security’s unit of account and an entity therefore would not consider it when
measuring fair value. Comments on the proposed ASU are due by November 14,
2021.
Background
Stakeholders have observed diversity in practice related to
whether contractual sale restrictions should be considered in the measurement of
the fair value of an equity security subject to such restrictions. On the basis
of interpretations of existing guidance and the example in ASC 820-10-55-52 of a
restriction on the sale of an equity instrument, some entities use a discount
for contractual sale restrictions when measuring fair value, while others view
the application of such a discount to be inconsistent with the principles of ASC
820. To reduce diversity in practice and increase the comparability of reported
financial information, the proposed ASU would clarify this guidance and amend
the example.
Main Provisions of the Proposed Changes
Under the proposed ASU, a contractual restriction on the sale of an equity
security would not be considered part of the unit of account of the equity
security. Accordingly, an entity would not consider it when measuring the fair
value of the equity security (i.e., the entity would not apply a discount
related to the contractual sale restriction).
In addition, under the existing guidance in ASC 820-10-35-6B, “[a]lthough a
reporting entity must be able to access the market, the reporting entity does
not need to be able to sell the particular asset or transfer the particular
liability on the measurement date to be able to measure fair value on the basis
of the price in that market.” The proposed ASU would clarify that an entity
should apply this existing guidance when measuring the fair value of equity
securities that are subject to contractual sale restrictions (i.e., a
contractual sale restriction that prevents the sale of the equity security in
the market does not prevent an entity from measuring the fair value of the
equity security on the basis of the value of the same equity security that is
not subject to a contractual sale restriction in that market).
Finally, the proposed ASU would amend the example in ASC 820-10-55-52 and add a
new example (ASC 820-10-55-52A) to illustrate whether and, if so, when an entity
should consider a sale restriction in measuring fair value.
Connecting the Dots
The proposed ASU’s examples note that when measuring fair value, an
entity should:
- Consider sale restrictions that are characteristics of the equity security (e.g., a restriction resulting from a security that is not registered for sale with (1) a national securities exchange or (2) an over-the-counter market when other securities from the same class of stock are registered for sale).
- Not consider sale restrictions that are characteristics of the holder of the equity security (e.g., a lock-up agreement or a market stand-off agreement).
The proposed ASU’s amendments are consistent with the principles of fair value
measurement under which an entity is required to consider characteristics of an
asset or liability if other market participants would also consider those
characteristics when pricing the asset or liability. In addition, the proposed
guidance clarifies that an entity would apply these fair value measurement
principles specifically to an equity security that is subject to contractual
sale restrictions.
Proposed Effective Dates and Transition
Effective Dates
The FASB has not set any potential effective dates for the proposed ASU’s
amendments. The Board plans to determine such dates after considering
stakeholder feedback on the proposed ASU.
Transition
For investment companies as defined in ASC 946,3 the amendments would be applied to equity securities with a contract
containing a sale restriction that is executed or modified on or after the
adoption date. For equity securities with a contract containing a sale
restriction that was executed before the adoption date, investment companies
would continue to apply the historical accounting policy for measuring such
securities until the contractual restrictions expire or are modified.
All entities other than investment companies as defined in ASC 946 would
apply the amendments prospectively and recognize in earnings on the adoption
date any adjustments made as a result of such adoption.
Footnotes
1
FASB Proposed Accounting Standards Update (ASU), Fair
Value Measurement of Equity Securities Subject to Contractual Sale
Restrictions.
2
FASB Accounting Standards Codification (ASC) Topic 820,
Fair Value Measurement.
3
FASB Accounting Standards Codification Topic 946,
Financial Services — Investment Companies.