Estimated reading time: 4 minutes

The article in brief:

• Accounting Standard Update (ASU) 2026-03 will require investment companies to consider contractual sale restrictions when measuring the fair value of equity securities.
• Early adoption is permitted beginning September 9, 2026.
• FASB added a separate project to explore expanding the scope to all entities. For non-investment companies, fair value guidance in ASU 2022-03 is still effective.

FASB Adds Investment Company Exception under ASC 820, Fair Value Measurement

The Financial Accounting Standards Board (FASB) issued ASU 2026-03, which makes a targeted update to Accounting Standards Codification (ASC) 820 for the fair value of equity securities subject to contractual sale restrictions. The changes would apply only to investment companies defined under ASC 946, Financial Services – Investment Companies. The change could directly affect net asset value (NAV), portfolio performance metrics, management fees, investor reporting, and transaction pricing for investment companies holding contractually restricted positions.

The update addresses concerns that accounting guidance in ASU 2022-03 did not reflect how market participants value equity securities subject to contractual sale restrictions. FASB moved quickly on this project. The accelerated timeline coincides with increased attention on large private company initial public offerings (IPOs) and the potential impact of contractual sale restrictions on investment company reporting. FASB added the project to its agenda in June 2026, issued a proposal in August, and finalized the guidance just one month later.

Disclosures, Effective Date and Transition Requirements for Investment Companies

Annual and interim financial statement disclosures would be required for the discount attributable to contractual sale restrictions. Investment companies should consider the existing disclosure objectives under ASC 820 when determining the level of disclosure disaggregation.

Early adoption will be permitted on any date on or after September 9, 2026. Mandatory adoption will apply to annual reporting periods beginning after December 15, 2027, and to interim reporting periods within those annual reporting periods. Investment companies must apply the changes prospectively to all equity securities as of the adoption date. Any adoption adjustments should be recognized immediately in earnings and must be disclosed in the period of adoption.

What Are Contractual Sale Restrictions?

Contractual sale restrictions commonly arise in lock-up agreements related to privately held securities that are later offered in an IPO. Under these contractual arrangements, insiders and other shareholders agree not to sell their shares for a specified period after the IPO, restricting their ability to immediately access the public market.

Valuation Challenges Under ASU 2022-03

Under ASU 2022-03, contractual sale restrictions generally were treated as a characteristic of the holder rather than the security. As a result, entities typically were not allowed to apply a discount for lack of marketability (DLOM) when measuring the fair value of securities subject to lock-up provisions.

Recent and anticipated record-setting IPOs have renewed attention on valuing high-profile private-company holdings as they prepare to enter public markets. Stakeholders told FASB that guidance in ASU 2022-03 can produce fair value measurements that do not reflect how market participants would value equity securities subject to contractual sale restrictions.

This issue is not limited to investment companies. Similar valuation issues may arise for corporations that invest directly in start-ups or through corporate venture capital (CVC) arms.

Respondents’ feedback to the proposal suggested expanding the scope to all entities, not just investment companies, as well as additional asset classes. As a result, FASB added a project to its technical agenda to explore whether the guidance should apply to all entities. FASB will need to conduct additional research into other asset classes before initiating a formal project on that issue.

How ASU 2026-03 Differs from ASU 2022-03

ASU 2026-03 does not overturn ASU 2022-03. Instead, it creates a narrow exception for investment companies within the scope of ASC Topic 946. ASU 2022-03 will continue to apply to all other entities. In general, ASC 820 requires that security-specific restrictions be considered in fair value estimates, while holder-specific restrictions are not. For example, unregistered private investment in public equity (PIPE) securities cannot trade on the same market as registered shares of the same entity. That restriction is deemed a characteristic of the security and, as such, should be considered in fair value estimates until the shares are registered on an exchange. In such cases, a DLOM may be appropriate when estimating fair value. In other situations, such as pre-IPO lock-up provisions, non-investment companies will continue to ignore those restrictions in their fair value measurements.

What Investment Companies Should Do Next

Investment companies should assess valuation policies, disclosures, and financial reporting timelines in preparation for adopting ASU 2026-03 and evaluate whether early adoption is appropriate, including the impact on 2026 financial statements.

Investment companies evaluating adoption may also benefit from reviewing broader portfolio valuation governance and fair value measurement considerations to determine whether existing policies, controls, and documentation adequately support valuations involving contractual sale restrictions.

Funds considering early adoption should assess whether their current valuation processes can quantify and support DLOMs related to contractual sale restrictions. While methodologies for estimating these impacts are generally well established, newer funds may need to review accepted techniques for estimating DLOMs. The AICPA’s updated draft, Valuation of Privately-Held-Company Equity Securities Issued as Compensation Accounting and Valuation Guide, suggests best practices for determining the DLOM for financial reporting purposes.  While other models and methods are described, the Finnerty model (2012) and the Asian Protective Put (Ghaidarov) are generally favored.  This AICPA guide is expected to be finalized by the end of the year.

Conclusion

ASU 2026-03 represents a significant shift for investment companies holding contractually restricted equity securities. While the final standard is limited to investment companies, FASB’s decision to explore broader application suggests the debate over fair value measurement of contractual sale restrictions remains unsettled.

VRC’s Portfolio Valuation practice group has extensive experience valuing complex securities, including credit and debt instruments, derivatives, equity, and structured products. To discuss how this guidance may affect valuation considerations, financial reporting requirements, or governance processes, please contact the author or any VRC professional.