Investment companies should be aware of new Financial Accounting Standards Board (FASB) guidance that could affect the valuation of certain equity securities. The amendments provide a narrow exception to fair value measurement of the effects of contractual restrictions for investment companies.

In September 2026, the FASB issued Accounting Standards Update (ASU) 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions. Upon adoption, the ASU will require all investment companies within the scope of Topic 946 to include the effects of contractual sale restrictions on the fair value of equity securities. Upon the adoption of the amendments in ASU 2026-03, an investment company will consider contractual sale restrictions, including those that are not part of the related equity security (e.g., a lock-up restriction) when measuring fair value. This will differ from how a reporting entity that is not an investment company will consider such restrictions when measuring fair value.

Background

Although the term “contractual sale restriction” is not defined in the FASB Accounting Standards Codification, it generally refers to a contractual arrangement which prohibits or limits the holder’s ability to sell an asset during a specified period, such as a lock-up agreement, market standoff agreement, or certain agreements between shareholders.

Under Topic 820 (before adopting the amendments in ASU 2026-03), a contractual sale restriction that limits the holder’s ability to sell an equity security but is not included in the unit of account of the security itself, generally is considered a characteristic of the holder rather than a characteristic of the asset. Therefore, such restriction is not considered in measuring fair value of the related equity security. Accordingly, under current Topic 820 guidance, these types of contractual sale restrictions are not reflected in the fair value measurement, and an otherwise identical restricted equity security generally is measured using the market price of the unrestricted security.

Feedback from industry stakeholders indicated that measuring the fair value of equity securities without considering the effects of these types of contractual sales restrictions is not consistent with the value that market participants would place on those shares. Stakeholders specifically noted that contractual sale restrictions expose holders to liquidity risk and price volatility during the restriction period. These concerns became increasingly significant as private companies remained private longer and entered public markets at higher valuations. As a result, stakeholders noted that the economic effects of lock-up restrictions have become more significant to market participant assessments of the value of equity securities.

Those stakeholders expressed concern that current guidance may overstate fund net asset values (NAV), distort performance and fee calculations, and create different outcomes for purchasing, redeeming, and remaining investors. These issues are particularly significant for certain investment companies, such as open-end mutual funds that regularly purchase and redeem fund shares at NAV.

Key provisions of ASU 2026-03

The amendments create a narrow exception to Topic 820 for investment companies within the scope of Topic 946 by requiring contractual sale restrictions that prevent the holder from selling an equity security on the measurement date to be reflected in fair value measurements regardless of whether the restriction is viewed as a characteristic of the holder or of the security.

Under the ASU, an investment company that cannot sell an equity security on the measurement date because of a contractual restriction is required to incorporate the effect of the restriction into the security’s fair value measurement by applying a discount. The discount should reflect the amount that market participants would demand because of the restriction, including consideration of the risks associated with being unable to sell the security during the restriction period.

The guidance does not apply when the economic effect of the restriction is already reflected in another transaction entered into by the reporting entity. For example, when equity securities are pledged as collateral and the restriction is reflected in the economics of the borrowing arrangement, no additional discount is applied when measuring fair value. This exception is intended to prevent double counting of the economic effect of a restriction.

In addition to existing disclosures in Topic 820 for equity securities subject to contractual sale restrictions, investment companies will also be required to disclose the amount of the discount attributable to contractual sale restrictions on equity securities. However, those disclosures do not apply to equity securities that are restricted from sale because they are pledged as collateral and are included in disclosures required by other Topics.

When multiple restricted investments are held, entities should consider the overall disclosure principles within Topic 820 when determining the appropriate level of aggregation or disaggregation to undertake when presenting fair value disclosures.

In order to timely address the relevant financial reporting implications, the FASB limited the scope of these amendments to investment companies within the scope of Topic 946. All other reporting entities will continue to exclude contractual sale restrictions from fair value measurements. However, the FASB decided to add a project to its technical agenda to separately address the fair value measurement of equity securities subject to contractual sale restrictions for all entities.

Further, the application of the guidance is limited to equity securities and does not extend to other asset classes such as debt securities or crypto assets.

Effective date and transition

The amendments are effective for annual reporting periods beginning after Dec. 15, 2027, including interim periods within those fiscal years. Early adoption is permitted on any date on or after the issuance date of the ASU (Sept. 9, 2026).

An investment company within the scope of Topic 946 will be required to apply the amendments prospectively to all equity securities, including securities subject to contractual sale restrictions that are in effect on the adoption date. Any adjustment resulting from adoption is recognized in current-period earnings on the adoption date, and the amount of the transition adjustment shall be disclosed in the period of adoption.

What does CohnReznick think?

For funds that hold significant equity positions in pre-IPO and newly public companies with contractual sale restrictions, the amendments may impact valuation processes, which will likely result in cascading impacts to NAV reporting and investor transactions. Implementation efforts may require investment companies to develop additional methodologies for estimating discounts associated with contractual sale restrictions. Impacted funds should take care to understand this ASU and its impact on their financial reporting. Begin by evaluating your portfolio holdings to identify equity securities that are subject to contractual sale restrictions and assessing your current valuation processes to identify gaps in requirements to determine the effect, if any, of contractual sale restrictions on fair value measurements for those securities.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.