FASB requires investment companies to factor sale restrictions into fair value for restricted equity securities

# What changed

Update that changes how investment companies measure the fair value of equity securities subject to contractual sale restrictions. Under the new guidance, restricted equity securities held by entities within the scope of Topic 946, Financial Services — Investment Companies, must reflect those contractual restrictions when measuring fair value.

# Why the change

FASB chair Richard Jones said the update "addresses stakeholder concerns that current guidance can produce fair value measurements that do not reflect how market participants would value equity securities with contractual sale restrictions" and that requiring investment companies to reflect those restrictions "better aligns reported amounts with the economics of the restricted shares."

# What the ASU requires

• For investment companies within Topic 946, the ASU provides an exception to Topic 820, Fair Value Measurement, by requiring that a contractual restriction on sale be considered in measuring fair value of an equity security.
• The amendments also require a disclosure of the amount of the discount attributable to the contractual sale restriction.

# Effective date and adoption options

The amendments are effective for annual reporting periods beginning after Dec. 15, 2027, and for interim reporting periods within those annual periods. Early adoption is allowed. An investment company in Topic 946 that elects early adoption may do so on any date on or after the issuance date of the update.

# Practical implications for investment companies and stakeholders

Measuring restricted shares at a value that reflects the restriction will likely change reported NAVs for funds holding those securities. That change can influence reported performance, fee calculations tied to NAV or performance, and the economics for shareholders entering or exiting funds holding restricted securities.

Funds will need to determine appropriate discounts attributable to contractual sale restrictions and include those amounts in disclosures. That introduces a new valuation input for many investment companies and may require updates to valuation policies, models, and controls. Service providers and auditors should expect to review these adjustments and the new disclosures.

# Related FASB activity

FASB is also working on fair value reporting for investment companies operating in the private credit market. The board noted differences in the information provided about loans accounted for at amortized cost by banks versus loans accounted for at fair value by investment companies, suggesting additional guidance or clarification may follow for other investment types.

# Bottom line

The ASU modifies fair value measurement practice for investment companies by requiring contractual sale restrictions on equity securities to be reflected in fair value and disclosed as a discount. The change aims to align financial reporting with how market participants would value restricted securities and to improve comparability and transparency in investment company reporting.