If a reporting entity holds an asset that has restrictions on its sale, transferability, or use (i.e., a restricted asset), the impact of the restriction on fair value depends on whether the restriction is a characteristic of the asset, which, in turn, depends on the source of the restriction and its connection to the underlying security. The assessment of whether a restriction is a characteristic of the asset, and as such a part of the unit of account, can be judgmental.
In June 2022, the FASB issued ASU 2022-03
, Fair Value Measurements of Equity Securities Subject to Contractual Sale Restrictions
. ASU 2022-03
amended Example 6, Case A in ASC 820
and further clarified within ASC 820
that a contractual restriction on the sale of an equity security (for example, an underwriter lock-up agreement) is not considered part of the unit of account of an equity security. As a result, such restriction is not considered in measuring the fair value of the equity security.
Example 6, Case A: Restriction on the Sale of an Equity Security in ASC 820
through ASC 820-10-55-52A
) illustrates two examples of equity securities with a restriction on sale, one where the restriction is part of the unit of account of the asset and thus considered when measuring the fair value, and another example where the restriction is not part of the unit of account of the asset and thus not taken into account when measuring fair value (a contractual restriction). The example where a restriction is considered when measuring fair value relates to Class A shares that were issued through a private placement and that are legally restricted from being sold until such shares are registered (or an exemption from registration has been obtained). In that example, the restriction on Class A shares is part of the unit of account of the Class A shares and thus a market participant would consider the inability to resell the security in the fair value measurement of the security. The impact on the fair value measurement as a result of the restriction will vary depending on:
- the nature and remaining duration of the restriction;
- the extent to which buyers are limited by the restriction (for example, there might be a large number of qualifying investors); and
- qualitative and quantitative factors specific to both the instrument and the issuer.
In the second example within Example 6, Case A, a reporting entity holds Class A shares that are eligible for sale on a national securities exchange or an over-the-counter market. In that example, the reporting entity enters into a contractual arrangement to refrain from selling the Class A shares for a specified time period. In practice, such contractual arrangements are usually as a result of lock-up or market standoff agreements. In this case, because the restriction arose from a contractual arrangement that is not part of the unit of account of Class A shares, and therefore not a characteristic of the asset, there is no impact to the fair value measurement for the inability to sell the Class A shares.
In terms of transition, there is a notable distinction between investment companies, as defined in ASC 946
, and non-investment companies. For non-investment companies, ASU 2022-03
is applied prospectively with adjustments resulting from the initial adoption recognized in earnings and disclosed. For investment companies, ASU 2022-03
is applied prospectively to any contractual sale restriction that is executed or modified on or after
the date of adoption. An investment company that holds an equity security subject to a contractual sale restriction that was executed prior to adoption would continue to account for the equity security using its existing accounting policy, until the contractual restriction expires or is modified.
is effective for public business entities for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, the guidance is effective for fiscal years beginning after December 15, 2024, and interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance.
Refer to FSP 188.8.131.52 for the disclosure requirements for restricted equity securities as a result of ASU 2022-03