FASB Proposes Fair Value Amendments for Restricted Equity in Investment Companies
The Financial Accounting Standards Board has issued a proposal that would require investment companies to account for contractual sale restrictions when measuring the fair value of equity securities, a change that would close a long-standing gap between reported values and the prices market participants would actually accept.
What the Proposal Changes
The current rule and its shortcoming
Under ASC 820, Fair Value Measurement, entities currently ignore contractual restrictions on selling an equity security when determining its fair value. The practical result is that a fund holding restricted shares and a fund holding freely tradable shares issued by the same company both arrive at the same fair value figure, using the unrestricted market price as the reference point.
FASB heard from stakeholders that this approach does not reflect economic reality. A restricted share cannot be sold at the same time or on the same terms as an unrestricted share, so treating them identically produces numbers that market participants would not recognise as accurate.
What would be required under the new approach
The proposal would do two things for investment companies. First, it would require them to incorporate a contractual sale restriction into the fair value measurement of any affected equity security. Second, it would require separate disclosure of the discount amount attributable to that restriction. Both changes apply specifically to investment companies; the proposal does not overturn the general ASC 820 principle for other entity types.
Why Stakeholders Pushed for This
Specific reporting problems identified
The stakeholder concerns that reached FASB pointed to three concrete distortions caused by the existing guidance:
- Net asset value can be overstated when restricted shares are carried at unrestricted market prices.
- Performance reporting and the management fees calculated from it can be skewed upward.
- Shareholders who purchase, redeem, or remain in a fund at different times may experience different economic outcomes because valuations do not reflect the actual liquidity of the underlying holdings.
These are not abstract concerns. For auditors signing off on investment company financial statements, and for CFOs relying on those statements to run fund operations, the distortion has real downstream consequences on fee calculations, investor communications, and regulatory filings.
Implications for Accounting Firms and Auditors
Audit and valuation work
If the proposal is finalised, audit teams will need to assess how investment company clients identify equity holdings subject to contractual sale restrictions and how they quantify the associated discount. The methodology for estimating that discount is not prescribed in the proposal text as summarised, which means firms should expect clients to develop or adopt a range of approaches. Auditors will need to evaluate the reasonableness of those approaches, likely drawing on specialist valuation expertise.
Disclosure review
The requirement to disclose the discount amount adds a new line item to financial statement footnotes. Audit and review engagements covering investment companies will need updated procedures to verify completeness and accuracy of that disclosure. Firms advising on financial statement preparation should flag this requirement early in the engagement planning cycle.
Engagement with the comment process
FASB is seeking comments on the proposal. Accounting firms with investment company clients, as well as those advising private equity funds, venture capital vehicles, or any registered investment company holding restricted equity, have a direct interest in how the final standard is written. The comment period represents a practical opportunity to raise operational questions, particularly around discount quantification methodology and transition requirements. Firms that plan to submit comments should begin reviewing the full exposure draft now rather than waiting for the deadline to approach.
What to Watch
The proposal is at the exposure draft stage, so a final effective date has not been set. Firms should track FASB's project page for the comment deadline and any subsequent deliberations. Given the relatively targeted scope of the change, specifically investment companies rather than all ASC 820 reporters, a shorter deliberation period is plausible, but that is not guaranteed.
For a broader view of how accounting standard-setting interacts with professional competency requirements, see our coverage of the IFAC 2026 International Education Standards and what they mean for accountancy practice.
Source: Journal of Accountancy
FAQ
FAQ
The proposed amendments apply specifically to investment companies. Entities outside that classification continue to follow the existing ASC 820 principle, which does not require a contractual sale restriction to be factored into fair value measurement.
Under the proposal, investment companies would be required to disclose the amount of the discount attributable to any contractual sale restriction applied when measuring the fair value of an equity security.
When restricted shares are measured at the same price as freely tradable shares issued by the same company, the fund's net asset value can be overstated. That overstatement can affect performance metrics, management fee calculations, and the relative treatment of shareholders who buy, redeem, or stay invested at different times.
FASB is accepting comments on the exposure draft. Firms with investment company clients, including private equity and venture capital engagements, can submit formal responses to raise questions on discount methodology, disclosure format, or transition requirements. Monitoring FASB's project page for the comment deadline is the first step.
No. The proposal is scoped specifically to investment companies. The broader ASC 820 principle, under which contractual sale restrictions are not considered when measuring fair value, remains in place for other entity types.