FASB Proposes Clarifying that Contractual Restrictions on Equity Sales Don't Count in Fair Value Measurements

Chris Gaetano
Published Date:
Sep 16, 2021
The Financial Accounting Standards Board (FASB) has proposed amending guidance in Topic 820 to 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, therefore, is not considered in measuring fair value.

The current language says that when 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 a market participant also would take those characteristics into account. Key to that determination is the unit of account for the asset or liability being measured at fair value.

Since it was released, however, FASB reported, "Some stakeholders noted that Topic 820 contains conflicting guidance on what the unit of account is 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." 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. 

Comments on the proposal are being accepted until Nov. 14. 

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