The FASB has issued ASU 2022-03, Fair Value (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, which clarifies whether a contractual restriction that prohibits the sale of an equity security should be considered when measuring the fair value of the equity security in accordance with Topic 820, Fair Value Measurements. In addition, ASU 2022-03 requires new disclosures for equity securities that include contractual sale restrictions.

ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the equity security’s unit of account, and therefore, should not be considered when measuring the fair value of the equity security. As such, equity securities that are subject to such contractual sales restrictions would measure fair value on the same basis of an identical equity security that is not subject to such a restriction. Examples of such restrictions may include lock-up agreements, market stand-off agreements, or other certain sales restriction provisions between shareholders.

Furthermore, ASU 2022-03 requires the following specific disclosures related to equity securities that are subject to contractual sales restrictions:

1. The fair value of equity securities subject to contractual sales restrictions reflected in the balance sheet
2. The nature and remaining duration of the restriction(s)
3. The circumstances that could cause a lapse in the restriction(s)

For public business entities, ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. For all other entities, ASU 2022-03 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. 

For entities that qualify as an investment company under Topic 946, Financial Services – Investment Companies, ASU 2022-03 should be applied to all equity securities in which the contractual sales restriction is executed or modified on or after the date of adoption. Any equity securities subject to a contractual sale restriction executed before the date of adoption should continue to account for the equity security until the contractual restrictions expire or are modified under the accounting policy applied before the adoption of ASU 2022-03.

For all other entities, ASU 2022-03 should be applied prospectively with any adjustments from the adoption recognized in earnings and disclosed on the date of adoption. 

The full text of ASU 2022-03 is available here.

 

^{Readers should not act upon information presented without individual professional consultation.}