The US Financial Accounting Standards Board (FASB) has released an accounting standards update (ASU) that changes how investment companies, including mutual funds, determine the fair value of equity securities subject to contractual sales restrictions.
Existing generally accepted accounting principles do not factor a contractual restriction on the sale of an equity security into the fair value measurement.
Consequently, holders of restricted shares and holders of unrestricted shares in the same investee typically use the market price of the unrestricted security to establish fair value.
Stakeholders said this approach can lead investment companies to report a higher net asset value (NAV) than is warranted.
It can also affect performance reporting and management fees, while producing different results for investors who purchase, redeem or continue to hold shares.
The ASU provides an exception to Topic 820, Fair Value Measurement, for investment companies within the scope of Topic 946, Financial Services-Investment Companies.
These entities must consider contractual restrictions on the sale of an equity security when measuring its fair value.
Investment companies covered by the amendments must also disclose the portion of any discount that relates to the contractual restriction on sale.
FASB chair Richard R. Jones said: "The new standard addresses stakeholder concerns that current guidance can produce fair value measurements that do not reflect how market participants would value equity securities with contractual sale restrictions.
"By requiring investment companies to reflect those restrictions in fair value measurement, the ASU better aligns reported amounts with the economics of the restricted shares."
"FASB updates fair value rules for investment companies" was originally created and published by The Accountant, a GlobalData owned brand.