FASB seeks comment on fair value reporting proposal

FASB published a proposed Accounting Standards Update (ASU) intended to improve investment company financial reporting by amending how investment companies measure the fair value of an equity security that is subject to a contractual sale restriction.

The deadline for comments is July 17.

For investment companies, the proposed amendments would require them to consider a contractual sale restriction when measuring the fair value of an equity security, according to a news release. Investment companies also would be required to disclose the amount of the discount attributable to contractual sale restrictions.

The proposed change would make investment company financial reporting more useful by aligning the fair value measurement of restricted equity securities with the value market participants would place on those shares.

Under ASC 820, Fair Value Measurement, an entity does not consider a contractual restriction on selling an equity security when measuring that security at fair value. As a result, an entity holding a restricted equity security and an entity holding an unrestricted equity security issued by the same investee generally measure fair value using the market price of the unrestricted security.

Stakeholders told FASB that current guidance can produce fair value measurements that do not reflect how market participants would value equity securities with contractual sale restrictions, particularly for investment companies, according to the news release. Stakeholders said that current guidance can overstate net asset value; distort performance reporting and management fees; and create different outcomes for purchasing, redeeming, and remaining shareholders.

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.