The Financial Accounting Standards Board released a proposed Accounting Standards Update on Wednesday that looks to amend how investment companies measure the fair value of an equity security that is subject to a contractual sale restriction.
Under FASB Accounting Standards Codification Topic 820, Fair Value Measurement, an entity doesn’t 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 would measure fair value using the market price of the unrestricted security, the FASB says.
But stakeholders have indicated to the FASB that current guidance can result in fair value measurements that don’t reflect how market participants would value equity securities with contractual sale restrictions, particularly for investment companies. They said the guidance can overstate net asset value, distort performance reporting and management fees, and create different outcomes for purchasing, redeeming, and remaining shareholders.
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For investment companies, the proposed amendments would require them to consider a contractual sale restriction when measuring the fair value of an equity security. Investment companies also would be required to disclose the amount of the discount attributable to contractual sale restrictions.
The proposed changes 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, the FASB says.
If the changes are finalized, an investment company would be required to apply the amendments in the proposal prospectively to all equity securities with any adjustments from the adoption of the proposed amendments recognized in earnings, the proposed ASU says. Early adoption would be permitted.
Stakeholders are encouraged to review and provide comments on the proposed ASU by July 17, 2026.
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