Key Takeaways
- Investment companies must now apply a discount for contractual sale restrictions, such as post-IPO lock-ups, when measuring the fair value of equity securities, and must disclose the amount of that discount.
- The rule covers all Topic 946 investment companies, including private funds, at every level of the fair value hierarchy.
- Early adoption is available now. Mandatory adoption begins with annual periods starting after December 15, 2027.
ASU 2026-03 requires investment companies to price contractual sale restrictions into the fair value of equity securities, with no grandfathering and a one-time adjustment to earnings on day one.
Overview and Scope
In September 2026, the FASB issued ASU 2026-03, Investment Companies with Equity Securities Subject to Contractual Sale Restrictions, amending Topic 820, Fair Value Measurement. The amendments create an exception: an investment company within the scope of Topic 946 must now consider a contractual restriction on the sale of an equity security, such as a lock-up agreement, when measuring that security’s fair value. The scope is deliberately narrow. The rule applies only to equity securities, not debt securities, crypto assets, or other asset types, and it does not change fair value guidance for entities outside Topic 946. The ASU does not define “contractual sale restriction,” since existing guidance already requires entities to identify such restrictions.
Why This Matters to Private Capital Managers
When a portfolio company goes public, a fund’s stake can become a quoted security overnight, yet the fund may be unable to sell it for months. Until now, GAAP has told investment companies to disregard that lock-up and mark the shares at the full quoted price. This is not only a mutual fund issue. The Board considered exempting private and closed-end funds and decided against it, because NAV feeds management fees, carried interest, distributions, and the pricing of new investor admissions and secondary transfers in every fund structure. Buyout, growth, and venture managers with positions in recently public companies will feel it most directly, as will credit managers holding equity from restructurings or warrants. Funds of funds will see the effect through the NAVs of the funds they hold.
A simple illustration. A fund holds one million shares of a recently public portfolio company, quoted at $40 per share, with several months remaining on the lock-up. Today, the position is carried at $40 million. If market participants would demand a 10% discount for the restriction, it is carried at $36 million, and the $4 million difference runs through earnings and NAV on the adoption date. (Illustrative only. The ASU does not prescribe a discount method or size.)
Background
ASU 2022-03, issued in June 2022, established that a contractual sale restriction is a characteristic of the holder rather than of the security, and therefore should not be considered in determining fair value. Market participants, however, commonly discount restricted shares, and because investment companies report and generally transact at NAV, stakeholders argued the guidance could overstate it. The FASB also noted that companies are staying private longer and going public at larger valuations, giving each lock-up more economic weight. The Board moved from agenda request in April 2026 to a unanimous final standard in September. Some members observed that the discount has no net effect on cumulative income or cash flow, since the security realizes its full value once the restriction lapses, but supported the exception because investors transact at NAV.
Measurement and Disclosure
The discount must reflect the amount market participants would demand because of the restriction, measured against an otherwise identical unrestricted security of the same issuer in the same market, at any level of the fair value hierarchy. Restrictions already reflected in the economics of another transaction, such as securities pledged as collateral for a borrowing, are excluded to avoid double counting, and immaterial items need not be adjusted. Investment companies must disclose the amount of the discount for interim and annual periods, alongside the existing disclosures on fair value, the nature and remaining duration of each restriction, and the circumstances that could lift it.
Effective Date, Early Adoption and Transition
The amendments are effective for annual periods beginning after December 15, 2027 (January 1, 2028 for a calendar-year fund), and interim periods within them. Early adoption is permitted on any date on or after September 9, 2026, so the date a fund chooses can affect NAV, subscriptions and redemptions, and investor reporting. Application is prospective from the adoption date to all equity securities, including those already restricted. There is no grandfathering. Any adjustment is recognized in earnings on the adoption date and disclosed in the period the amendments are first applied.
Five Questions to Settle Now
- Which positions carry contractual restrictions today, and when do they lapse?
- What discount methodology will the valuation committee support, and how will it be documented?
- When will you adopt, and how will timing affect investor admissions, transfers, and fees?
- Do your valuation policy, fund documents, and controls need updating?
- Have you aligned with your auditor and any third-party valuation provider?
Gen II Fund Services supports managers with NAV calculation, fee and carry computation, financial reporting, and investor reporting, and can help you identify affected positions, model the adoption impact, and build the required process and disclosure support. Contact us to start the conversation.
