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On 30 June 2022, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) for improving financial reporting for investors and other financial statement users by increasing comparability of financial information across reporting entities that have investments in equity securities measured at fair value and are subject to contractual restrictions preventing the sale of those securities.

Topic 820, Fair Value Measurement, states that for measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, (including restrictions on the sale of the asset or liability), if such characteristics are taken into account by a market participant. An important consideration in this regard is the unit of account for the asset or liability being measured at fair value.

Based on the feedback received from different stakeholders, FASB noted that Topic 820 contains conflicting guidance with respect to the unit of account, when measuring the fair value of an equity security. This has resulted in diversity in practice on whether the effects of a contractual restriction that prohibits the sale of an equity security should be considered in measuring that equity security’s fair value.

Therefore, the amendments in the ASU have clarified that a contractual restriction on the sale of an equity security would not be considered as a part of the unit of account of the equity, security and therefore would not be considered in measuring the fair value. The ASU has also introduced certain new disclosure requirements for equity securities which are subject to contractual sale restrictions19

  1. The fair value of equity securities subject to contractual sale restriction(s),
  2. The nature and remaining duration of the restriction(s), and
  3. Circumstances that could cause a lapse in the restriction(s).

Effective date: The amendments in this update are effective for public business entities for fiscal years beginning after 15 December 2023, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after 15 December 2024, and interim periods within those fiscal years.

FASB also decided to permit early adoption for both interim and annual financial statements that have not yet been issued or made available for issuance.

To access the text of the ASU, please click here

  1. Equity securities which are restricted from sale due to being pledged as collateral and included in other disclosures required by other Topics would not be included in the information required to be disclosed as per the new requirements.

Action points for auditors

Auditors that are performing audits under the US Generally Accepted Accounting Principles (GAAP) should take note of clarification and disclosure requirements issued by FASB and should refer the various illustrations and implementation guidance given in the ASU. These clarifications will be applicable for fiscal years beginning after 15 December 2023 and 15 December 2024 and interim periods within those fiscal years, as the case may be.

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