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FASB ASU: investment companies must factor contractual sale restrictions into fair value

 

FASB finalized the rule requiring investment companies to discount restricted equity in fair value - effective for annual periods beginning after Dec. 15, 2027.

FASB issued a final Accounting Standards Update requiring investment companies within the scope of Topic 946 to consider contractual restrictions on the sale of equity securities when measuring fair value. Under current GAAP, those restrictions are ignored, meaning a fund holding locked-up shares and a fund holding freely tradable shares of the same issuer generally measure fair value the same way. The ASU ends that practice for investment companies.

BY THE NUMBERS

See below

EFFECTIVE

2

SOURCES TRACKED

Sep 14

LAST UPDATED

FASB

ISSUER

The amendments are effective for annual reporting periods beginning after Dec. 15, 2027, and for interim periods within those annual periods, per the Journal of Accountancy. Early adoption is permitted. Application is prospective, with any adjustment from adoption recognized in earnings - no retroactive restatement of prior periods.

For the close, the practical question is whether the fund holds any equity securities subject to post-IPO lock-ups or other contractual sale restrictions. Where it does, the fair value measurement process will need to incorporate a discount for lack of marketability attributable to that restriction. The ASU also requires disclosure of the discount amount, which means a new footnote line item will be needed.

FASB's stated rationale is that current guidance produces fair value measurements that do not reflect how market participants would value restricted shares - a gap that grew more visible as large private companies approached public markets with longer lock-up periods and higher valuations.

FASB has separately added a project to explore extending the scope of the restriction-discount requirement beyond investment companies to all entities. That project is still open; the current ASU applies only to Topic 946 entities.

WHAT TO DO IN THE CLOSE

 
 Identify all equity securities held that are subject to contractual sale restrictions, including post-IPO lock-up agreements.
 
 Update fair value measurement policies and valuation models to incorporate a discount for contractual sale restrictions for each affected security.
 
 Design a new disclosure that quantifies the discount amount attributable to each contractual sale restriction.
 
 Confirm with external auditors how they expect the prospective adoption adjustment to be presented in the period of adoption.
 
 Monitor FASB's separate project on extending the restriction-discount requirement to all entities before the 2027 effective date.
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QUESTIONS THIS ANSWERS

Does this ASU apply to all companies that hold restricted equity securities?

No. The ASU applies only to investment companies within the scope of ASC Topic 946. FASB has a separate, still-open project exploring whether to extend the requirement to all entities.

What is the effective date for the FASB investment company fair value ASU?

Annual reporting periods beginning after Dec. 15, 2027, and interim periods within those annual periods. Early adoption is permitted.

What disclosure is required under the new ASU?

Investment companies must disclose the amount of the discount attributable to contractual sale restrictions for affected equity securities.

SOURCES

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A living page: it is re-read and updated as coverage arrives; last updated Monday September 14. Facts come from the linked sources; confirm against the issuer's own text before relying on it.

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