If a reporting entity holds an asset that has restrictions on its sale, transferability, or use (i.e., a restricted asset), the fair value measurement should be adjusted to reflect the discount, if any, a market participant would apply as a result of the restriction. The impact of a restriction on the sale or use of an asset depends on whether the restriction is part of the instrument itself, and therefore, would be considered by market participants in pricing the asset.
Example 6, Case A: Restriction on the Sale of an Equity Instrument of ASC 820 (ASC 820-10-55-52 through ASC 820-10-55-53) illustrates a situation in which a reporting entity holds an equity instrument (a financial asset) for which sale is legally or contractually restricted for a specified period. For example, such a restriction could limit sale to only qualifying investors. The restriction is a characteristic of the instrument and, therefore, would be transferred to market participants. In that case, the fair value of the instrument would be measured on the basis of the quoted price for an otherwise identical unrestricted equity instrument of the same issuer that trades in a public market, adjusted to reflect the effect of the restriction. The adjustment would reflect the amount market participants would demand because of the risk relating to the inability to access a public market for the instrument for the specified period. The adjustment will vary depending on all of the following:
  • the nature and 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.

Example 6, Case A will be replaced with a new example as part of the adoption of ASU 2022-03. Refer to FV 4.8 for further details.
Also, Case B: Restrictions on the Use of an Asset in ASC 820 (ASC 820-10-55-54 through ASC 820-10-55-55) illustrates the impact of two different restrictions on the use of donated land to a not-for-profit organization. In those examples, the not-for-profit organization is perpetually restricted to use the donated land as a playground while owned by the not-for-profit organization; however, the organization is not restricted from selling the land. The donated land is also subject to an easement that gives a utility company the legal right to run power lines across it. In the instance of a perpetual restriction on the use of the property, it determines that the contractual restriction exists through an agreement (donor agreement) that is separate and distinct from the asset itself. The restriction would not legally be transferred to market participants if the land were to be sold as it is not part of the deed or legal description of the property. Therefore, this asset restriction is specific to the not-for-profit organization and another owner could use the land for other purposes. In this case, the restriction is not considered in the fair value measurement of the land since the restriction is not an attribute of the asset itself and thus not a relevant input for market participants when determining the fair value of the land (that is, the not-for-profit organization would be required to measure fair value assuming the highest and best use for the land even if that use is not as a playground). In contrast, the easement for the utility lines is specific to the land and would transfer to a market participant. Therefore, the fair value measurement of the land would take into account the effect of the easement regardless of what the highest and best use of the land is.
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