FASB Proposal Could Change How Investment Companies Value Restricted Equity Securities
Editor’s Note (September 2026): Following publication of this article, FASB issued ASU 2026-03. For details on the final guidance, disclosure requirements, transition provisions, and early-adoption considerations, see our latest update, “FASB ASU 2026-03 Changes Fair Value Accounting for Restricted Equity Securities.”
July 7, 2026
Estimated reading time: 3 minutes
The article in brief:
- FASB is proposing a targeted change that could affect how investment companies value restricted equity securities.
- The proposal would require investment companies to consider contractual restrictions when measuring the fair value of an equity security.
- If finalized, the guidance could affect NAV calculations and 2026 financial statements.
Current Guidance May Not Reflect Market Realities
Current accounting guidance under ASC 820, Fair Value Measurement, generally requires that shares subject to a contractual restriction on sale and otherwise identical shares not subject to such a restriction be measured at the same fair value.1 Investment companies have noted that this guidance does not reflect how market participants value shares that are subject to contractual ‘lock-ups’, as they cannot sell the equity for a specified period. For investment companies, applying current guidance can overstate net asset value (NAV), distort performance reporting and management fees, and create different outcomes between purchasing, redeeming, and remaining shareholders.
As companies stay private longer and enter public markets at higher valuations, contractual lock-up restrictions on recent IPOs and planned offerings may affect equity security values and a fund’s NAV.
The gap between accounting fair value and the economic value that market participants would assign to shares subject to contractual restrictions has prompted the FASB to fast-track a project to address these concerns.
FASB Proposes Investment Company Exception
On July 1, 2026, the FASB issued an exposure draft proposing a narrow exception to ASC 820 for investment companies as defined under ASC 946, Financial Services-Investment Companies. Under the exception, investment companies would be required to consider contractual restrictions when measuring the fair value of equity securities.
Annual and interim financial statement disclosure would be required for the discount attributable to contractual sale restrictions.
When the Changes Could Take Effect
The FASB will determine the effective date after the comment letter closes on July 17, 2026. If approved, investment companies would be required to apply the changes prospectively to all equity securities as of the date of adoption. Early adoption would be permitted on any date on or after the issuance date of the final standard, for financial statements that have not been issued or made available for issuance.
The project could be finalized before year-end, which could affect 2026 financial statements. VRC will continue to follow developments.
What This Means for Investment Companies
Investment companies may need to reassess valuation policies, disclosures, and financial reporting timelines if the proposal is finalized. Funds with restricted equity positions should consider whether current valuation processes are prepared to quantify and support discounts related to contractual sale restrictions.
VRC’s Portfolio Valuation Practice Group has extensive experience in valuing complex securities, including credit/debt instruments, derivatives, equity, and structured products. If you have any questions on how this proposal could impact your valuations, please contact the author or any VRC professional.
