Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Liabilities, became effective for nonpublic companies during 2019. ASU 2016-01 introduces new guidance that impacts most equity investments, including equity securities without a readily determinable market value. In light of ASU 2016-01, many financial institutions are evaluating how the new standard impacts the accounting for investments in Visa Class B stock.
As a reminder, many financial institutions received Class B shares of Visa, Inc. as part of a restructuring and public offering by Visa U.S.A. in 2007. Institutions that were members of Visa U.S.A. received the Class B shares based on their interest in Visa U.S.A. and did not pay anything to acquire the stock. Before the adoption of ASU 2016-01, institutions recorded this investment at historical cost, which was $0. The Class B shares are restricted pending ongoing legal issues. This restriction generally prevents Class B shareholders from selling their shares, except to other Class B shareholders.
Since Visa Class B shares are not traded in a liquid market and currently are not convertible to other securities, the securities meet the definition in ASU 2016-01 of an equity security without a readily determinable market value. According to the standard, an entity may elect to measure an equity security without a readily determinable fair value at its cost minus impairment (if any) plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, with any changes recognized through net income (the “alternative measurement method”). Although the sale of Class B shares is restricted, many institutions have received offers to purchase their Class B shares.
Because of the accounting standard changes and the growing number of offers to purchase the restricted Visa Class B shares, we have received numerous questions regarding how to account for Visa Class B shares. Below are answers to some of the most common questions:
Our institution received a legitimate offer to sell Visa Class B shares. Can we “write up” our value in these shares based on this offer?
No, ASU 2016-01 requires institutions using the alternative measurement method to adjust the value of equity securities based on observable prices in orderly transactions. The offer to purchase does not represent a transaction and, as a result, cannot be used as the basis for adjusting the value of the investment.
We received information that a peer institution sold their Visa Class B shares. Can we “write up” our value on our Visa Class B shares based on the peer’s transaction price?
Possibly. ASU 2016-01 would require securities measured using the alternative measurement method to be adjusted based on observable price changes in orderly transactions from identical or similar investments of the same issuer. Sufficient detail would need to be observed in order to substantiate the transaction price details and to verify the shares sold are identical or similar to those held by your institution. It is our experience that institutions selling Class B shares are being instructed by the purchaser not to disclose details of the transaction, which may make it difficult to observe comparable transactions. An orderly transaction is one that assumes it has been exposed to the market for a period of time. If sufficient details can be obtained to observe the transaction price in an orderly sale of Visa Class B shares, it may be appropriate to adjust the value of your holdings accordingly.
We decided to sell a portion of our Visa Class B shares. Can we “write up” the remaining shares based on the transaction price from the shares sold?
Possibly. Your institution must first determine whether the sale represents an orderly transaction. For instance, if negotiations preceding the sale were with only one party, it may be difficult to conclude the transaction was exposed to the market for a period of time. If your institution concludes the sale represented an orderly transaction, the remaining Visa Class B shares should be adjusted to the sale price of the identical securities.
What happens after the outstanding litigation is settled and the conversion price of Class B shares into Class A shares is fixed?
There is currently a conversion rate in place for converting Class B shares into Class A shares (which are actively traded); however, such conversions are currently restricted and subject to change based on the outcome of outstanding litigation. If the restrictions are removed and the conversion rate between Class B shares and Class A shares becomes fixed, the investment would then be accounted for at fair value based on the conversion rate and quoted market prices of Class A shares.