FASB updates fair value reporting for mutual funds

The Financial Accounting Standards Board published an accounting standards update Wednesday to improve how investment companies such as mutual funds can measure the fair value of an equity security that’s subject to a contractual sale restriction.

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Under current U.S. GAAP, a contractual restriction on the sale of an equity security isn’t considered when measuring the fair value of that security. That means an entity holding a restricted equity security and an entity holding an unrestricted equity security issued by the same investee typically would measure fair value using the market price of the unrestricted security.

Stakeholders told FASB that applying the current guidance can overstate the net asset value reported by investment companies, distort performance reporting and management fees, as well as lead to various outcomes for purchasing, redeeming and remaining shareholders.

“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,” said FASB chair Richard Jones in a statement. “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.”

For investment companies within the scope of Topic 946, Financial Services — Investment Companies, the amendments in the update provide an exception to Topic 820, Fair Value Measurement, by requiring that a contractual restriction on the sale of an equity security be considered in measuring the fair value of the equity security. The amendments also require those investment companies to disclose the amount of the discount attributable to the contractual sale restriction.

The amendments in the accounting standards  update are effective for annual reporting periods beginning after Dec. 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is allowed. An investment company within the scope of Topic 946 that early adopts the amendments in the update is permitted to do so on any date on or after the issuance date of the update. 

FASB is also working on a standard for fair value reporting for investment companies in the private credit market. 

“When they account for it at fair value, some of the disclosure requirements and some of the information that’s provided about the loan at amortized cost by a bank is very different than the information that’s provided for a loan that’s accounted for at fair value in an investment company,” Jones recently told Accounting Today.