FASB is proposing a clarification to U.S. GAAP that would explain that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the security and therefore is not considered in measuring fair value.
Amendments in a proposed Accounting Standards Update issued Wednesday are intended to clarify that matter. The proposal is designed to increase the comparability of financial information across reporting entities that have investments in equity securities measured at fair value that are subject to such contractual restrictions.
Under FASB ASC Topic 820, Fair Value Measurement, a reporting entity that is measuring fair value should consider the characteristics of the asset or liability, including restrictions on the sale of that asset or liability, if a market participant also would take into account those characteristics. Key to that determination is the unit of account for the asset or liability being measured at fair value.
According to FASB, Topic 820 contains conflicting guidance on what the unit of account is when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring the fair value of that security.
The proposal issued Wednesday is designed to eliminate that diversity in practice. Comments on the proposal can be made through Nov. 14 at FASB's website.
— Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is the JofA's editorial director.