The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions. The ASU creates a narrow exception to Topic 820’s fair value guidance that applies only to investment companies within the scope of Topic 946. The new guidance applies to investment companies that hold equity securities measured at fair value and subject to contractual sale restrictions, such as lock-up or market standoff agreements. The FASB considered defining the term “contractual sale restrictions” in the ASU but concluded that a definition was unnecessary.
Current fair value treatment
Under current guidance, a contractual sale restriction is generally viewed as a characteristic of the reporting entity holding the equity security rather than a characteristic of the security itself. As a result, entities generally measure the fair value of an equity security subject to a contractual sale restriction on the basis of the market price of an otherwise identical unrestricted equity security and do not separately recognize the impact of the contractual sale restriction.
New requirement to apply a discount
ASU 2026-03 changes that model for investment companies. When an investment company cannot sell an equity security on the measurement date because of a contractual sale restriction, the investment company must incorporate the effect of the restriction in the fair value measurement by applying a discount. The discount should reflect the amount market participants would demand because of the restriction, regardless of whether it is a characteristic of the reporting entity or the security itself.
The amendments apply only to investment companies and only to equity securities. They do not apply to other asset classes, such as debt securities or crypto assets within the scope of Subtopic 350-60. In addition, the new guidance does not require a discount for restrictions on equity securities when the restriction is reflected in the economics of another transaction, such as a borrowing in which the securities are pledged as collateral.
Disclosure requirements and implementation considerations
Under the new guidance, investment companies must disclose the amount of any discounts attributable to contractual sale restrictions included in the fair value measurement of equity securities, in both interim and annual reporting periods. Existing disclosure requirements for equity securities subject to contractual sale restrictions continue to apply, including disclosures about the securities’ fair value, the nature and remaining duration of the restrictions, and the circumstances under which the restrictions could lapse.
Affected investment companies should assess how the new guidance may affect net asset value-related calculations, management fees, incentive allocations, investor transactions, financial statement disclosures, and transition requirements. They also should develop supportable valuation methodologies for any sale-restriction discounts and update relevant processes and controls to address the ASU’s new measurement and disclosure. requirements
Effective date
The amendments are effective for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted on any date on or after September 9, 2026. Investment companies must apply the amendments prospectively to all in-scope equity securities, with any adjustment from adopting the amendments recognized in current-period earnings and disclosed in the period of adoption.
