On September 9, 2026, FASB issued Accounting Standards Update (ASU) 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions. The amendments create a narrow exception to existing fair value guidance for investment companies within the scope of Accounting Standards Codification (ASC) 946. Under the new guidance, an investment company must reflect the effect of a contractual sale restriction in the fair value of the equity securities in its portfolio. The ASU also requires investment companies to disclose the amount of the discount attributable to contractual sale restrictions.
The amendments are effective for annual reporting periods beginning after December 15, 2027, including interim periods within those annual periods. Early adoption is permitted on or after September 9, 2026. The amendments must be applied prospectively to all equity securities, with adoption adjustments recognized in earnings.
Who is Affected?
The amendments apply only to investment companies within the scope of ASC 946 that hold equity securities measured at fair value and subject to contractual sale restrictions. The existing guidance generally continues to apply to other entities.
Background
ASC 820 states that when measuring the fair value of an asset or a liability, a reporting entity should consider the characteristics of the asset or liability, including restrictions on the sale of the asset or liability, if a market participant also would take those characteristics into account. Under existing ASC 820 guidance, a contractual restriction on the sale of an equity security generally is considered a characteristic of the reporting entity holding the security rather than a characteristic of the security itself. Consequently, the restriction is not reflected in the security’s fair value.
In 2022, FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, clarifying that entities should exclude the effect of contractual sale restrictions when measuring the fair value of equity securities, as these restrictions are a function of the holder of the securities and not a characteristic of the security itself.
Following the issuance of ASU 2022-03, stakeholders expressed concerns that excluding contractual sale restrictions from fair value measurements did not reflect how market participants would value the affected securities. These concerns noted in the agenda request sent to FASB are “more significant … because companies are staying private longer and entering the public markets at larger valuations, and, as a result, the resulting lock-up restrictions may have a more significant economic effect on the value of an equity security.”1 Those concerns were particularly significant for investment companies because of the potential effect on the fund’s net asset value (NAV), performance reporting, management fees, and shareholder outcomes. In response, FASB created a narrow exception for investment companies within the scope of ASC 946.
What Changed?
Under the new guidance, an investment company within the scope of ASC 946 must incorporate the effect of a contractual sale restriction into the fair value measurement of an equity security when the company cannot sell the security at the measurement date because of that restriction.
Examples may include lock-up agreements, market-standoff arrangements, and certain separately negotiated provisions that temporarily prevent the investment company from selling an otherwise transferable equity security. The discount must reflect the amount market participants would demand because of the restriction.
The requirement does not apply when a restriction is reflected in the economics of another transaction, such as borrowing in which the securities are pledged as collateral.
Why it Matters
The accounting change will affect the fair value of eligible securities and, as a result, may affect reported NAV as of the measurement date. Depending on the governing documents and calculation methodologies, it may also affect management fees, carried interest, waterfall calculations, and investor reporting.
Implementation Considerations
Management should begin evaluating the company’s investment portfolios and valuation methodologies before the applicable year-end close.
Investment companies should consider the following areas before adopting the ASU:
1. Inventory Affected Securities & Agreements
Management needs to identify all investments that are subject to contractual sale restrictions.
The review should extend beyond investment records to relevant lock-up agreements, market-standoff agreements, and other contractual provisions that may restrict a potential sale of an investment.
2. Establish & Document the Valuation Methodology
Management should evaluate whether its existing valuation policies and methodologies appropriately address contractual sale restrictions under the new guidance. FASB did not provide a standard valuation model or discount size to be applied; thus, documenting an appropriate valuation model is management’s responsibility. As part of the implementation process, management should formally document a transparent valuation policy in valuing restricted securities as this will be a necessary expectation of auditors, regulators, and investors alike.
While the inputs and assumptions will vary across restricted securities to fit the facts and circumstances, management should consider and include typical assumptions and inputs in the policy, such as: type of restriction, remaining term, vesting schedule, liquidity and volatility of underlying security, transfer rights, expected distributions, and/or risk-free interest rate. Before adoption, management should evaluate how the affected fair value will impact the fund based on the established valuation policy.
This analysis may inform management’s decision about whether they adopt this ASU earlier than the required implementation date.
3. Strengthen Governance & Controls
Management should confirm that valuation committee materials and supporting documentation identify each restriction, its remaining duration, the valuation methodology and inputs used, and the resulting discount.
4. Prepare Disclosure Support
For affected equity securities, the amendments require disclosure of:
(a) the fair value of equity securities subject to contractual sale restrictions;
(b) the nature and remaining duration of the restriction(s);
(c) circumstances that could cause a lapse in the restriction(s); and
(d) the amount of the discount attributable to contractual sale restrictions included in the fair value measurement of equity securities. Entities with multiple affected securities should consider the existing guidance in ASC 820-10-50 in determining the appropriate level of disaggregation to meet the disclosure requirements.
How Forvis Mazars Can Help
Forvis Mazars can help investment companies understand the new requirements and prepare for adoption. This may include identifying affected investments, evaluating implementation readiness, and assessing related valuation processes, controls, financial reporting, and disclosures. If you have any questions or need assistance, please contact us.
- 1FASB ASU 2026-03, Basis for Conclusions, paragraph BC8.