On September 9, 2026, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions. The update amends ASC 820 to require investment companies within the scope of ASC 946 to reflect contractual sale restrictions in the fair value of restricted equity securities they hold.
What Changes Under ASU 2026-03
Under the previous standard (ASU 2022-03), investment companies treated a contractual sale restriction as a characteristic of the investment company holding the security rather than the security itself, resulting in no adjustment between identical restricted and unrestricted shares.
Under the new standard, when an investment company holds an equity security it cannot sell on the measurement date because of a contractual restriction, such as a post-initial public offering (IPO) lock-up, it must now apply a discount that reflects what a market participant would demand for taking on that restriction. The update did not prescribe a valuation model or a standard discount amount, so the size of the discount depends on the restriction's remaining term, transfer rights, conditions that could cause it to lapse, and the volatility and liquidity of the unrestricted security, among other factors.
The exception applies at Level 1, Level 2 or Level 3 of the fair value hierarchy. It does not apply to restrictions already reflected in a separate arrangement, such as securities pledged as collateral for a borrowing. All other entities continue to apply ASU 2022-03 and disregard contractual sale restrictions when measuring fair value.
Why This Matters Beyond Private Equity and Venture Funds
Most early coverage of ASU 2026-03 has focused on private equity and venture capital funds holding pre-IPO positions, but the update has broader impact. Business development companies (BDCs) and other credit-focused funds that receive equity co-investments, warrants, or restructuring equity alongside debt investments can hold the same kind of restricted positions once a portfolio company goes public. A BDC carrying a warrant or equity kicker subject to a lock-up must now apply the same discount analysis as a venture fund holding a lock-up position from a portfolio company's IPO.
For open-ended funds, the change can affect net asset value (NAV), the price used for subscriptions and redemptions, management fees, incentive allocations, and reported performance. Because NAV is set on a transaction date, an investor who redeems while a restricted position is overstated receives more than that investor's economic share, and the remaining investors absorb the difference. Applying the required discount at the right time is a matter of parity among investors, not simply compliance.
Effective Date and Transition
The amendments are effective for annual reporting periods beginning after December 15, 2027, including interim periods within those annual periods, for public and nonpublic investment companies alike. Early adoption is permitted for any interim or annual period on or after September 9, 2026.
Transition is prospective: on the adoption date, the new measurement is applied to all restricted equity securities held, then recognize any resulting adjustment in current-period earnings and disclose the resulting change in the period of adoption.
Prepare for Adoption Now
Investment companies can start by identifying every contractual sale restriction across their equity holdings and separating true contractual restrictions from legal or regulatory restrictions, which were already reflected in fair value before this update. From there, investment managers should:
- Confirm whether any restriction's economic effect is already captured in a separate arrangement, such as a pledge, to avoid double-counting the discount.
- Select and document a valuation method for each restriction and calibrate the market-participant assumptions, as the valuation committee will need to support their process, and the auditors and administrators will request that support.
- Model the effect on NAV, fees, and performance or incentive allocations before the first reporting period under the new guidance, particularly if early adoption is under consideration.
- Update disclosure controls to capture the discount amount required under the new guidance, alongside existing restricted-security disclosures.
How We Guide You Forward
Cherry Bekaert's Asset Management professionals help investment managers, valuation committees, and boards of directors work through fair value and disclosure changes like ASU 2026-03. You may not have expected to be impacted by this update, but you don’t have to go it alone. Contact our professionals to discuss how the new guidance applies to your holdings and reporting timeline, and see how we can help.
