The Financial Accounting Standards Board issued an Accounting Standards Update on Wednesday that the board says improves how investment companies, such as mutual funds, measure the fair value of an equity security that’s subject to a contractual sale restriction.
Under current U.S. GAAP, a contractual restriction on the sale of an equity security isn’t considered when measuring the fair value of that security. Thus, 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 told the 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.
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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 a statement on Sept. 9. “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 in the ASU are effective for annual reporting periods beginning after Dec. 15, 2027, and interim reporting periods within those annual reporting periods.
Early adoption is permitted. An investment company within the scope of Topic 946 that early adopts the amendments is allowed to do so on any date on or after the issuance date of this ASU, the FASB said.
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