FASB Proposes Investment Co. Fair Value Measurement Changes

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• On July 1, 2026, the Financial Accounting Standards Board (FASB) issued a proposed Accounting Standards Update (ASU) that would amend Topic 820, “Fair Value Measurement,” for investment companies with equity securities subject to contractual sale restrictions.
• The proposal would create 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 also would disclose the amount of the discount attributable to contractual sale restrictions.
• Comments on the proposed ASU are due by July 17, 2026.

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Background

Under current Accounting Standards Codification (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 proposed 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

The proposed ASU would require 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 would reflect the amount market participants would demand because of the risk related to the inability to sell the security during the restriction period.

The proposal would not require investment companies to consider restrictions when the economics of the restrictions are reflected in another arrangement, 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 proposed discount would need to reflect market participant assumptions about liquidity risk during the restriction period.

Disclosing the discount

The proposal also would require 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

The FASB will determine the effective date of the proposal after evaluating stakeholder comments.

If the proposal is finalized, affected investment companies would apply the amendments prospectively to all equity securities, including securities subject to contractual sale restrictions existing at adoption, beginning on the date of adoption. Any adjustment from adoption would be recognized in current-period earnings, and the investment company would disclose the amount recognized. Early adoption would be permitted.

Stakeholders have until July 17, 2026, to review and provide comments on the proposed ASU.

Crowe observation: The proposed 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.