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Clarification of fair value guidance for equity securities in the FASB update

On Thursday, the Financial Accounting Standards Board (FASB) updated its fair value measurement standard to resolve any confusion regarding equity securities.

Topic 820's accounting standards update (ASU 2022-03) implements a suggestion made by the FASB in September 2021. All organizations with investments in equity securities subject to contractual restrictions barring their sale and valued at fair market value are affected by the changes.

The update makes it clear that a contractual prohibition on selling an equity security should not be taken into account when determining fair value. Additionally, it mandates the disclosure of the following information for equity securities subject to contractual sale limitations:

The following information is included in the balance sheet:

1. The fair value of equity securities subject to contractual sale restrictions;

2. The type and remaining duration of the restriction(s); and

3. The potential triggers for a restriction lapse (s).

The update aims to improve generally accepted accounting principles (GAAP) by "reducing diversity in practice, reducing the cost and complexity in measuring fair value, and increasing comparability of financial information across reporting entities that hold those investments," according to FASB. The update does not alter the fundamentals of fair value measurement.

The changes take effect for fiscal years beginning after December 15, 2023, as well as interim periods within those fiscal years, for public business entities. The amendments take effect for all other entities' fiscal years that start after December 15, 2024, as well as any interim financial periods within those fiscal years. It is okay to adopt children young.


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