FASB proposes changes in fair value measurement of equity securities

The Financial Accounting Standards Board proposed an accounting standards update Wednesday aimed at improving the comparability of financial information from companies with investments in equity securities measured at fair value that are subject to contractual restrictions preventing the sale of those securities.

Topic 820, Fair Value Measurement, says that when measuring the fair value of an asset or a liability, an entity should consider the characteristics of the asset or liability, including any restrictions on its sale, if a market participant also would take those characteristics into account. One of the main factors in that determination is the unit of account for the asset or liability being measured at fair value.

Fair value measurement proved to be a thorny issue during the 2008-2009 financial crisis, and FASB had to make rapid changes to its standards in response to rapid declines in value of various securities.

Courtesy of GASB

Some of the board's stakeholders have pointed out that Topic 820 contains some conflicting guidance on what the unit of account is when measuring the fair value of an equity security. That has led to differences in practice on whether the effects of a contractual restriction that bars the sale of an equity security should be considered when measuring its fair value.

“Some stakeholders apply a discount to the price of an identical equity security that is not subject to a contractual sale restriction, whereas other stakeholders consider the application of a discount to be inappropriate under the principles of Topic 820,” the board said.

To deal with this concern, the amendments in FASB’s proposed update would clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and thus is not considered in measuring fair value.

FASB is asking for comments on the proposal by Nov. 14, 2021.