The Financial Accounting Standards Board (FASB) on Thursday issued an update to its fair value measurement standard that clarifies conflicting guidance regarding equity securities.
The accounting standards update (ASU 2022-03) to Topic 820 implements a proposal put forward by FASB in September 2021. The changes affect all entities with investments in equity securities measured at fair value and subject to contractual restrictions preventing their sale.
The update clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to contractual sale restrictions:
- The fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet;
- The nature and remaining duration of the restriction(s); and
- The circumstances that could cause a lapse in the restriction(s).
The update does not change the principles of fair value measurement and seeks to improve generally accepted accounting principles (GAAP) by “reducing diversity in practice, reducing the cost and complexity in measuring fair value, and increasing comparability of financial information across reporting entities that hold those investments,” FASB stated.
The amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2023, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2024, and interim periods within those fiscal years. Early adoption is permitted.