FASB's ASU 2026-03 Closes a Fair Value Gap for Restricted Securities Held by Investment Companies

New Guidance Requires ASC 946 Entities to Discount Restricted Shares in Fair Value Measurements

Recently, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2026-03, creating a narrow but consequential exception to ASC 820 for investment companies within the scope of ASC 946, including mutual funds, hedge funds, private equity funds, venture capital funds, and similar entities whose primary business is investing for capital appreciation and investment income.

The Problem the ASU Addresses

Under prior guidance, a contractual sale restriction, such as a lock-up agreement following an IPO or financing transaction, was treated as a characteristic of the holder rather than the underlying security. Because of that distinction, the restriction was not reflected in the fair value measurement. The practical effect: an ASC 946 entity holding restricted shares generally reported the same value as an investor holding identical, unrestricted shares, even though the restricted holder could not readily sell, hedge, or otherwise protect the position during the restriction period.

The FASB concluded that this approach could overstate net asset value (NAV), distort performance reporting and management fees, and fail to capture the discount that market participants would actually assign to a restricted position.

What Changes Under ASU 2026-03

The ASU requires ASC 946 entities to incorporate the effect of contractual sale restrictions directly into the fair value measurement of affected equity securities, and to separately disclose the amount of the related discount. Because NAV often sets the price at which investors enter and exit a fund, reporting a restricted security at full unrestricted value can inflate NAV and distort allocations among purchasing, redeeming, and remaining investors. Requiring the discount to be measured and disclosed is intended to correct that distortion and give investors a more accurate picture of fund performance.

Importantly, the FASB was clear that this is a limited exception, not a broader change to the underlying ASC 820 principle that contractual sale restrictions generally fall outside the unit of account for a security. The amendments apply only to ASC 946 investment companies; accounting for restricted securities held by other types of entities is unchanged.

Why It Matters Now

Lock-up agreements are common following IPOs and financing rounds, and many funds within scope of ASC 946 hold positions subject to them at any given time. Fund managers, valuation professionals, and fund administrators will need to build a defensible process for quantifying these discounts and supporting the related disclosures, particularly as auditors and investors begin looking for this treatment in upcoming reporting periods.

How Citrin Cooperman Can Help

Citrin Cooperman's Valuation and Forensic Services Practice works with fund managers, general partners, and administrators to value restricted and illiquid positions, build supportable discount methodologies, and prepare for the disclosure requirements introduced by new standards like ASU 2026-03. Our team can help organizations assess how the new guidance applies to their portfolio, develop a consistent valuation approach for restricted securities, and stand behind that work under audit scrutiny.

To learn more, contact Ajay Mishra.