The FASB has issued an Exposure Draft for public comment that is intended to reduce diversity in practice on whether a contractual restriction that prohibits the sale of an equity security should be considered in measuring its fair value in accordance with Topic 820, Fair Value Measurements.

Topic 820 requires entities to consider the characteristics of an asset or liability, including restrictions on the sale of the asset or liability, if a market participant would take into account those characteristics when measuring fair value. The amendment clarifies that a contractual sales restriction would be a characteristic of the reporting entity holding the equity security, rather than a characteristic of the equity security, and would not be considered when measuring its fair value.  

Under the proposed guidance, equity securities that are subject to contractual restrictions that prevent the sale of the security would measure fair value on the same basis of an identical equity security that is not subject to such a restriction.

The effective date of the amendments in the Exposure Draft has not yet been determined. For entities that qualify as an investment company under Topic 946, Financial Services – Investment Companies, the amendments in this Exposure Draft would be applied to all equity securities in which the contractual sales restriction is executed or modified after the effective date. For all other entities, the amendments in the Exposure Draft would be applied prospectively to all equity securities, with any adjustments as a result of applying the amendments to be recognized in current period earnings on the date of adoption.  

The full text of the Exposure Draft is available here.

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