Standards Update: ASU No. 2022-03, Fair Value Measurement (Topic 820)
The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below is an ASU that was recently issued.
ASU No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
The FASB has issued Accounting Standards Update (ASU) No. 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, to increase comparability of financial information for entities that hold equity securities with contractual restrictions prohibiting the sale of the securities. Currently, there is diversity in practice on the application of a discount to measure fair value when securities have such contractual restrictions. The ASU provides clarity related to this matter. The ASU also adds disclosure requirements related to contractual sale restrictions.
ASU No. 2022-03 clarifies that contractual restrictions on the sale of equity securities should not be considered part of the unit of account of such securities and, therefore, should not be considered in fair value measurements. The ASU also notes that an entity cannot recognize and measure a contractual sale restriction as a separate unit of account. An example of a restriction on an equity security not reflected in measuring fair value would be when a shareholder enters into a lock-up agreement to not sell shares that would otherwise be eligible for sale on a national securities exchange or over-the-counter market. In this example, fair value would be based on the price in the principal or most advantageous market because the contractual sale restriction does not change the market in which the equity security would be sold.
If the contractual restriction on the sale of an equity security is on the equity security itself, that restriction would be considered in measuring fair value. An example of a restriction on an equity security that is reflected in measuring fair value would be shares issued through a private placement that are not registered and are legally restricted from being sold on a national securities exchange or over-the-counter market. In this example, fair value would be based on the market price of similar unrestricted securities, adjusted to reflect the impact of the restriction.
The ASU also adds the following disclosure requirements:
- The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet
- The nature and remaining duration of the contractual sale restriction(s)
- The circumstances that could cause a lapse in the contractual sale restriction(s)
Effective Date and Transition
ASU No. 2022-03 is effective for public business entities for fiscal years beginning after Dec. 15, 2023, and for all other entities for fiscal years beginning after Dec. 15, 2024. Early adoption is permitted.
For all entities other than investment companies, the amendments should be applied prospectively with any adjustments recognized in earnings and disclosed on the date of adoption. Investment companies (as defined in ASC 846, Financial Services—Investment Companies) should apply the amendments to equity securities subject to contractual sale restrictions executed or modified on or after the date of adoption. An investment company with equity securities subject to such restrictions executed before the date of adoption should continue to account for the equity securities using the same accounting policy in place prior to the adoption until the restrictions expire or are modified.
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