ASU 2026-03 Changes Investment Company Fair Value Measurements

In under a minute

• On Sept. 9, 2026, the FASB finalized new guidance that amends Topic 820, “Fair Value Measurement,” for investment companies with equity securities subject to contractual sale restrictions.
• The ASU creates a narrow exception to current Topic 820 guidance by requiring investment companies to include the effects of contractual sale restrictions, such as lockup agreements, when measuring the fair value of affected equity securities.
• The FASB said the change is intended to improve the decision usefulness of investment company financial reporting because excluding those restrictions can overstate net asset value, distort performance reporting and management fees, and create different outcomes among purchasing, redeeming, and remaining shareholders.
• Investment companies must now disclose the amount of the discount attributable to contractual sale restrictions.
• The ASU is effective for investment companies’ annual reporting periods beginning after Dec. 15, 2027, and interim reporting periods within those annual reporting periods. Early adoption is permitted.

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Background

Under current ASC 820 guidance, a contractual sale restriction on an equity security is considered a characteristic of the reporting entity holding the security rather than a characteristic of the security itself. As a result, an entity generally does not consider the effect of that restriction when measuring the fair value of the equity security and does not recognize the restriction as a separate unit of account.

The FASB clarified that guidance in ASU 2022-03 to reduce diversity in practice. However, stakeholders later told the board that excluding contractual sale restrictions from fair value measurements can result in measurements that do not reflect market prices or economic reality. Those concerns can be especially significant for investment companies because fair value measurements directly affect net asset value (NAV), which might be overstated, as well as performance reporting, management fee calculations, and the prices at which investors purchase and redeem fund shares.

In response, the FASB approved a narrow exception for investment companies within the scope of ASC 946 “Financial Services – Investment Companies,” that hold equity securities measured at fair value and subject to contractual sale restrictions.

Creating a narrow exception to Topic 820

ASU 2026-03, “Fair Value Measurement (Topic 820): Investment Companies With Equity Securities Subject to Contractual Sale Restrictions,” requires an investment company within the scope of Topic 946 to incorporate the effect of a contractual sale restriction when measuring the fair value of an equity security. The discount reflects the amount market participants would demand because of the risk related to the inability to sell the security during the restriction period.

The ASU does not require investment companies to consider restrictions when their economics are reflected in another transaction, such as equity securities pledged as collateral in a borrowing arrangement. 

Crowe observation: Affected investment companies might need to revisit valuation policies, pricing inputs, and controls over discounts for contractual sale restrictions. Rather than being a simple mechanical or policy-based discount, the discount would need to reflect market participant assumptions about liquidity risk during the restriction period.

Disclosing the discount

The ASU also requires investment companies to disclose the amount of the discount attributable to contractual sale restrictions included in the fair value measurement of equity securities. If an investment company has multiple affected investments, it would consider existing Topic 820 disclosure aggregation guidance when determining the appropriate level of detail.

Effective date and transition

ASU 2026-03 is effective for investment companies for annual reporting periods beginning after Dec. 15, 2027, including interim periods within those annual periods. Early adoption is permitted on any date on or after Sept. 9, 2026.

Affected investment companies must apply the ASU prospectively to all equity securities beginning on the date of adoption, including securities subject to contractual sale restrictions existing at adoption. Any adjustment from adoption would be recognized in current-period earnings, and the investment company would disclose the amount recognized.

Crowe observation: The ASU’s transition approach could create an immediate earnings and NAV effect at adoption because the amendments would apply prospectively to all equity securities, including securities subject to existing contractual sale restrictions. Investment companies with significant restricted equity investments might want to inventory those holdings and evaluate potential adoption effects.