The Financial Accounting Standards Board (FASB) issued a proposed Accounting Standard Update (ASU) on July 1, 2026, potentially impacting Topic 820, Fair Value Measurement relating specifically to investment companies with equity securities subject to contractual sale restrictions (such as “lock-up agreements” during an initial public offering). While Topic 820 applies broadly to all reporting entities, this proposal would create an industry-specific exemption for investment companies.
As Topic 820 currently stands, a company that holds the same equity position with and without contractual sale restrictions would show the same fair value for these positions. Topic 820 specifically notes that “a contractual sale restriction is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value of an equity security.” Furthermore, a company cannot recognize and measure a contractual sale restriction as a separate unit of account.
Interestingly, in June 2022, a clarifying ASU (ASU 2022-03) addressed this very topic as a result of diversity in practice. Ultimately, the ASU concluded (consistent with existing GAAP cited above) that the contractual sale restriction is attributable to the holding entity, not the equity itself, and so the contractual sale restriction should not impact the fair value measurement. ASU 2022-03 also noted the FASB Board considered an alternative treatment for investment companies at that time, i.e., valuation should consider contractual restrictions. Ultimately, the FASB rejected this alternative treatment. They did not want to introduce industry specific definitions of fair value measurement with the underlying concept being that the nature of the entity applying the principles should not change fair value measurement from the perspective of market participants.
This proposed ASU would provide an exception to Topic 820, specific to investment companies, requiring:
To the extent this proposal moves forward, early adoption will be permitted, and the ASU will be applied prospectively with any adjustments from adoption date recognized in earnings.
When considering the FASB’s existing standard and its proposed guidance, it’s important to keep in mind the general underlying concept of Topic 820 is to value investments at fair value, which is defined as:
“The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This proposed ASU aligns with that underlying concept in that an investment company will consider contractual restrictions as part of the fair value measurement of an investment — as would a market participant in determining a value that they would be willing to purchase or sell a given investment.
The proposed ASU represents a departure from the current ASC 820 framework by permitting investment companies to consider contractual sale restrictions in determining fair value.
So why is the investment company industry being singled out related to this proposed ASU, and why in such an expeditious manner? As part of the proposed ASU, the FASB does address these concerns by indicating while this concept needs to be considered more broadly, there are three drivers for their investment company focus now:
Ultimately, this all amounts to an about-face for the investment company industry — considering the FASB was weighing the same alternative treatment for investment companies when they issued the last related ASU in 2022 (ASU 2022-03). Prior to that ASU, there was diversity in practice with some investment companies considering contractual sale restrictions in the fair valuation measurement and others following a different approach. One possible driver for revisiting could be the recent proliferation of high profile IPOs. An investment company holding pre-IPO shares subject to a six-month lock-up could potentially apply a discount for the contractual restriction under the proposal, whereas current guidance generally prohibits recognizing such a discount.
As we continue to monitor this development, please reach out to your advisers to discuss any potential ramifications to your investment company.
Contact John Braun or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.