FASB updates investment company fair value reporting standard

An Accounting Standards Update issued by FASB aims to improve how investment companies measure the fair value of an equity security that is subject to a contractual sale restriction.

FASB said in a news release that for investment companies within the scope of Topic 946, Financial Services—Investment Companies, the amendments in the ASU provide an exception to Topic 820, Fair Value Measurement, requiring that a contractual restriction on the sale of an equity security be considered in measuring the fair value of the equity security. The amendments also require those investment companies to disclose the amount of the discount attributable to the contractual sale restriction.

“The new standard addresses stakeholder concerns that current guidance can produce fair value measurements that do not reflect how market participants would value equity securities with contractual sale restrictions,” FASB chair Richard Jones said in the news release. “By requiring investment companies to reflect those restrictions in fair value measurement, the ASU better aligns reported amounts with the economics of the restricted shares.”

The amendments will be effective for annual reporting periods beginning after Dec.15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted.

Under current GAAP, a contractual restriction on the sale of an equity security is not considered when measuring the fair value of that security. As a result, an entity holding a restricted equity security and an entity holding an unrestricted equity security issued by the same investee generally would measure fair value using the market price of the unrestricted security.

Stakeholders, according to the news release, told FASB that applying current guidance can overstate the net asset value reported by investment companies, 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 Bryan Strickland at Bryan.Strickland@aicpa-cima.com.