The U.S. Financial Accounting Standards Board (FASB) has amended the standards in Topic 820, Fair Value Measurement, that can enhance the usefulness of financial statements to investors and other users. The main objective is to increase the comparability of financial information on investments in securities (equity securities) subject to certain contractual restrictions preventing their sale, but which must be measured at fair value.
The current version of the U.S. standard states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability. Many financial experts have drawn the attention of U.S. regulators to the fact that the requirements in the current wording are inconsistent with the definition of units of account in the case of equity securities (unit of account is a key concept in measuring the fair value of assets or liabilities). As a result, in practice there are differences of opinion as to whether contractual restrictions that prohibits sale should be considered in measuring the equity security’s fair value.
The FASB clarifies this issue and states that contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.