Alternative Investment

Fair Value of Equity Securities: Impact of the New ASU 2022-03 Guidance

On June 30, 2022, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) with new guidance on the fair value of equity securities subject to contractual restrictions.

Known as ASU 2022-03, the update has potential implications for our alternative investment clients. In this blog post, we provide a topline summary of what you need to know.

New Guidelines on Equity Securities

This amendment provides guidelines on two types of equity restricted securities and how they may or may not be affected.

Equity securities restricted from sale based on a contractual agreement. The amendment applies if the shares are registered and available for sale on an exchange or OTC, for example, but terms in a private agreement specify that the holder cannot sell shares for a specific period of time.

Equity securities that are legally restricted from sale. In two specific cases, the ASU 2022-03 does not apply:

• Shares are not yet registered
• Conditions necessary for an exemption from registration have not yet been satisfied

Effective Dates

For private entities, this amendment becomes effective for fiscal years starting after December 15, 2024.

The FASB allows early adoption for both interim and annual financial statements that have not yet been issued or made available for issuance. The earliest date for early adoption was June 30, 2022, the date ASU 2022-03 was issued.

NOTE: This amendment only applies to securities executed or modified after the date of adoption. Securities held prior to date of adoption should be valued using the original valuation method.

Audit Documentation Considerations

In accordance with the ASU 2022-03 guidelines, be sure to provide your auditors with two supporting documents:

• Memo or email stating the official adoption date for funds that choose early adoption
• Updated valuation policy

Changes to Disclosure Requirements

For investments subject to contractual restrictions, the FASB requires three additional disclosures:

1. The fair value of equity securities subject to contractual sale restrictions should be reflected in the balance sheet. Your auditor or accountant can disclose this information as a separate line item or as a note at the bottom of the statement.
2. The nature and remaining duration of the restriction(s) should be stated either in the consolidated segment operating income (CSOI) or as a separate footnote.
3. Circumstances that could cause a lapse in the restriction(s) can be noted on the CSOI or as a separate footnote).

Stay Informed

At Richey May, we make it a priority to prepare our clients to remain compliant and conduct their business consistent with critical new guidelines from standard-setting bodies like the FASB. You can read the details of the new guidance on the fair value of equity securities here.

Contact Steve Vlasak if you have any questions about this report or the services we offer the alternative investments industry.