In this episode, Melisa Galasso breaks down a targeted FASB proposal impacting fair value measurement for a narrow group of investment companies. Find out who is affected, what the change means, and key deadlines for feedback.
- Overview of the FASB proposal addressing investment companies with equity securities under contractual sale restrictions
- Recap of previous guidance in ASU 2022-03 and why the current practice exists
- Explanation of how the proposal would allow a discount for unmarketable equity securities
- Determination of who is and is not impacted by this proposed exception
- Key comment period details and what stakeholders should know about the July 17th deadline
FASB Proposes Changes to Fair Value
Welcome to the Genuine Learning Blog! Today, Melisa Galasso discusses a proposed update from the FASB, featuring a notably brief comment period due to the proposed change’s narrow scope and limited impact. This update specifically targets investment companies holding equity securities that are subject to contractual sale restrictions.
To provide context, Melisa Galasso shares a quick history lesson regarding recent changes that impact fair value measurement. In ASU 2022-03, FASB sought to clarify and standardize how contractual sale restrictions are addressed for equity securities. Under Topic 820, Fair Value Measurement, a contractual sale restriction is not considered part of the unit of account—meaning it should not impact the fair value reported on the balance sheet. So, whether an equity security is freely tradable or subject to a sale restriction, its fair value remains the same under current guidelines. This update addressed previous diversity in practice, where some entities adjusted fair value based on sale restrictions and others did not.
However, Melisa Galasso notes that stakeholders raised concerns that this current approach can overstate net asset value for investment companies, leading to distorted performance metrics and management fees. In response, FASB is not proposing a wholesale change to Topic 820. Instead, the proposal carves out a narrow exception only for entities subject to Topic 946—Investment Companies. For these entities, the proposed change would allow a discount to fair value measurements for equity securities that cannot be sold due to contractual restrictions. Where such a discount is applied, investment companies would be required to disclose the amount attributable to the restriction, promoting transparency in their financial statements.
It’s important to remember this exception would not affect other entities, who must continue to ignore sale restrictions when determining fair value. Given the proposal’s narrow focus, FASB has instituted a very short comment period, with feedback due by July 17th. If you’re impacted by this proposal or have thoughts to share, Melisa Galasso encourages you to submit your comments to the FASB. Thank you for tuning in to this week’s update, and stay tuned for more timely educational content in future blogs!
