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FASB Issues Narrow Accounting Rule on Measuring Equity Shares

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

U.S. rulemakers issued a narrow accounting rule to clarify how to measure equity securities that are subject to a contractual sale restriction.

The FASB rule was issued on June 30, 2022, to state that companies should not consider any contractual restriction on the sale of an equity share when measuring the share’s fair value because the restriction is not part of the share’s unit of account.

The provisions also clarify that a company “cannot, as a separate unit of account, recognize and measure a contractual sale restriction.”

The guidance aims to stem confusion over language in an illustrative example in Topic 820, Fair Value Measurement, which has caused accounting differences among entities around how to consider the effects of a contractual restriction that prohibits the sale of an equity security in measuring that equity security’s fair value. Some apply a discount to the price of an equity security subject to a contractual sale restriction, whereas others consider the application of a discount to be inappropriate under the principles of Topic 820.

The clarifications however, barely skimmed through issuance as only four of the seven FASB members voted to issue them, a signal the topic might bubble up again later. Chair Richard Jones, Vice Chair James Kroeker, and board member Fred Cannon were the three who dissented, writing they “do not support the conclusion that precludes all entities from incorporating the effects of a contractual sale restriction in determining fair value,” among other arguments.

An approach that “would result in the de facto conclusion that a contractual sale restriction must be considered along with an equity security for purposes of determining the appropriate accounting would be preferable,” they wrote jointly.

Rules Take Effect in Two Years for Public Companies

The guidance, issued as Accounting Standards Update (ASU) No. 2022-03Fair Value Measurement (Topic 820), Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, would be to private placements, private investments in public equity, or a business combination involving a special purpose acquisition company (SPAC), also referred to as a deSPAC transaction.

Companies have two years to digest and adopt the changes, according to the rule text.

Specifically, for public companies, the guidance is effective for fiscal years beginning after Dec. 15, 2023, and interim periods within those fiscal years. For all other entities, it takes effect for fiscal years beginning after Dec. 15, 2024, and interim periods within those fiscal years. The amendments can however be applied earlier.

Entities are required to provide disclosures that would give investors a better understanding of the contractual sale restrictions and the liquidity risk presented to a company’s equity securities investments.

They would disclose “the fair value of equity securities subject to contractual sale restrictions reflected in the balance sheet,” the “nature and remaining duration of the restriction(s),” and the “circumstances that could cause a lapse in the restriction(s).”

To transition the rules, all entities, except investment companies as defined under Topic 946, Financial Services—Investment Companies, are required to apply the guidance prospectively with any adjustments “recognized in earnings and disclosed on the date of adoption.”

Qualifying investment companies should apply the rules to “an investment in an equity security subject to a contractual sale restriction that is executed or modified on or after the date of adoption.” If an investment company was incorporating the effects of the restriction in the measurement of fair value, it should continue to do so.


This article originally appeared in the July 1, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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