Locked Up, Marked Down? What FASB’s New Fair Value Rule Means for Investment Companies
The Financial Accounting Standards Board has changed how certain investment companies must value equity securities that cannot currently be sold because of a contractual restriction.
In September 2026, FASB issued Accounting Standards Update 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions.[1]
The update creates a targeted exception to existing fair value guidance. Under the new guidance, investment companies within the scope of Topic 946 will be required to consider contractual restrictions on the sale of equity securities - such as lock-up agreements - when measuring those securities at fair value.
The change may appear narrow, but it can have important consequences for net asset value, performance reporting, management fees, investor transactions, and the valuation processes supporting financial reporting.
What was the issue under existing guidance?
Under existing U.S. GAAP, a contractual restriction preventing the sale of an equity security generally is not considered when measuring the security’s fair value.
As a result, two entities holding the same equity security could arrive at the same fair value even if one could sell its shares immediately and the other was contractually prohibited from selling for a defined period.
Under that framework:
The market price of the unrestricted security generally informed the fair value measurement.
The contractual restriction was not treated as a separate unit of account.
A separate asset or liability was not recognized for the restriction.
For investment companies, stakeholders raised concerns that this treatment did not always reflect the economic value of restricted shares.
If an investment company cannot sell a security during the restriction period, a market participant may not place the same value on that position as it would on an otherwise identical security that can be sold immediately.
FASB noted that excluding the effect of a contractual sale restriction could overstate reported net asset value. Because investors may purchase or redeem shares based on NAV, the effect may extend beyond presentation on the financial statements.
It may also influence performance reporting, management fees, incentive allocations, distributions, and outcomes for purchasing, redeeming, and remaining shareholders.[1]
What does ASU 2026-03 change?
The new guidance requires an investment company within the scope of Topic 946 to incorporate the effect of a contractual sale restriction into the fair value measurement of the affected equity security.
In practical terms, the fair value conclusion should reflect how market participants would price the security while the restriction remains in effect.
The update also requires the investment company to disclose the amount of the discount attributed to the contractual sale restriction in the notes to its financial statements.
This represents a narrow exception to Topic 820. It is not a broad change to how every company values restricted equity securities.
Who is affected?
The amendments apply to:
Investment companies within the scope of Topic 946
Holding equity securities measured at fair value
When those securities are subject to contractual restrictions prohibiting their sale
The scope is based on whether the entity qualifies as an investment company under Topic 946 - not simply whether it is registered with the SEC or structured as a particular type of fund.
FASB considered limiting the amendments to registered investment companies, business development companies, or open-end funds. It ultimately concluded that the issue is relevant to all investment companies within Topic 946 because asset values can directly affect NAV and related calculations.[1]
The update does not apply to:
Operating companies outside the scope of Topic 946
Debt securities
Crypto assets
Restrictions whose effects are already reflected in another transaction entered into by the reporting entity
For example, if equity securities are pledged as collateral and the related restriction is already reflected in the economics of the borrowing transaction, the investment company should not reflect that effect again in the equity security’s valuation. This is intended to prevent double counting.
What types of restrictions are covered?
The guidance is directed at contractual restrictions on the sale of equity securities, including arrangements such as lock-up agreements.
FASB did not create a new definition of “contractual sale restriction.” Entities are already expected to identify and distinguish contractual restrictions from legal or regulatory restrictions when applying existing fair value guidance.
This distinction remains important.
A contractual restriction results from an agreement involving the reporting entity. A legal or regulatory restriction may attach to the security itself or arise from applicable law. The accounting treatment depends on the nature of the restriction and the relevant guidance.
Investment companies will need a reliable process for identifying qualifying restrictions and ensuring they are evaluated consistently.
Does the amendment prescribe a standard discount?
No.
ASU 2026-03 requires investment companies to consider the effect of the restriction, but it does not establish a universal percentage or formula.
That is important because not every contractual restriction has the same economic effect.
Factors that may influence the size of a restriction-related discount can include:
The length of the remaining restriction period
The volatility of the underlying security
The liquidity and trading activity of the unrestricted security
Expected dividends or other distributions
The size of the restricted position
The likelihood of an earlier release
The terms and enforceability of the restriction
The ability to hedge the economic exposure
Relevant market transactions involving comparable restricted securities
Current market conditions at the measurement date
A short restriction on a liquid, lower-volatility security may not have the same valuation effect as a longer restriction on a volatile or thinly traded position.
The analysis must therefore be specific to the security, restriction, and market conditions.
Why the disclosure requirement matters
The amendment does more than change the measurement. It also requires investment companies to disclose the amount of the discount attributed to contractual sale restrictions.
That information can help investors distinguish between:
Changes in the value of the underlying security
Changes caused by the restriction
Changes resulting from the passage of time as the restriction approaches expiration
Because contractual restrictions are temporary, the related discount may change as the remaining term shortens or other facts and circumstances evolve.
The disclosure may also help investors better understand how restricted positions affect NAV and reported performance.
Investment companies will need documentation capable of supporting both the valuation conclusion and the amount ultimately disclosed.
When does the new guidance take effect?
ASU 2026-03 is effective for annual reporting periods beginning after December 15, 2027, including interim periods within those annual periods.
Early adoption is permitted on any date on or after the issuance of the update.
Upon adoption, an investment company must apply the amendments prospectively to all affected equity securities with contractual sale restrictions - including restrictions already in effect on the adoption date.
Any adjustment resulting from adoption must be recognized in earnings on the adoption date. The amount of the adjustment must also be disclosed during the period in which the guidance is first applied.[1]
What should investment companies begin doing now?
The effective date provides time to prepare, but the change may require more than updating a written accounting policy.
Investment companies should consider the following steps.
1. Identify affected investments
Create an inventory of equity securities subject to contractual sale restrictions.
Relevant information may be found in:
Investment agreements
Subscription documents
Shareholder agreements
Lock-up agreements
Side letters
Transaction documents
Financing and collateral agreements
The inventory should identify the restriction’s terms, effective date, expiration date, modification provisions, and any circumstances that could permit an earlier sale.
2. Confirm that each restriction falls within the guidance
Not every limitation on transfer should automatically result in a restriction-related discount.
Determine whether the restriction is contractual, whether it prohibits the sale of an equity security, and whether its effect is already reflected in another transaction.
This determination should be documented before selecting a valuation methodology.
3. Determine an appropriate valuation approach
Investment companies will need to evaluate how market participants would price the specific restriction.
Depending on the facts and circumstances, the analysis may incorporate market evidence, option-based techniques, studies of restricted securities, volatility measures, expected holding periods, hedging considerations, or other relevant approaches.
The selected methodology should reflect the characteristics of the security and restriction - not simply rely on a standard discount applied across every investment.
4. Establish support for significant assumptions
Any restriction-related discount may depend on assumptions that require judgment.
Those assumptions should be:
Consistent with the measurement date
Supported by relevant market information
Applied consistently
Reviewed for reasonableness
Updated when circumstances change
Documented clearly enough for independent review
Sensitivity analysis may also help demonstrate how changes in significant assumptions affect the final conclusion.
5. Update policies, controls, and approval procedures
Investment companies may need to update:
Fair value policies
Valuation committee procedures
Data collection processes
Model validation practices
Review and approval controls
Financial statement disclosure procedures
Service-provider oversight
Period-end reporting calendars
Responsibility for identifying new or modified restrictions should also be clear. A valuation team cannot evaluate a restriction it does not know exists.
6. Evaluate the transition impact
Because the amendments apply to all qualifying restricted equity securities upon adoption, investment companies should estimate the potential effect on existing positions before the effective date.
That analysis can help firms anticipate:
The adjustment to earnings upon adoption
Changes to NAV
Potential effects on performance reporting
New disclosure requirements
Data or documentation gaps
Additional valuation and review resources
Firms considering early adoption will need to be particularly prepared because the guidance may be adopted on any date after issuance.
What should auditors and financial reporting professionals expect?
The new guidance will likely create additional questions around how a restriction-related discount was developed and supported.
Reviewers may examine:
Whether the entity is within the scope of Topic 946
Whether the restriction qualifies under the new guidance
Whether the restriction’s effect was already reflected elsewhere
Why the selected methodology was appropriate
Whether the data was relevant and reliable
How significant assumptions were developed
Whether the discount was applied consistently
How changes from prior periods were explained
Whether the required disclosures are complete
Whether the adoption adjustment was properly calculated
The most effective preparation will begin with the valuation process - not at the disclosure stage.
A narrow amendment with meaningful consequences
ASU 2026-03 does not rewrite the entire fair value framework. It addresses a specific issue affecting investment companies that hold contractually restricted equity securities.
But within that scope, the consequences can be meaningful.
A restriction-related discount may affect NAV, earnings, performance reporting, fees, and investor outcomes. The amendment therefore requires more than identifying that a restriction exists. Investment companies must determine how the restriction affects value and support that conclusion with an appropriate methodology, relevant evidence, documented assumptions, and consistent oversight.
Harvest provides independent and transparent financial instrument valuations supported by documented inputs, clear assumptions, and experienced valuation professionals.
Preparing for ASU 2026-03 or evaluating an equity security subject to contractual sale restrictions? Contact Harvest Investments to learn how our valuation team can support your process.
