Whether contractual sale restrictions should affect the fair value of equity securities has long been debated.
In 2022, the Financial Accounting Standards Board issued Accounting Standard Update 2022-03 to clarify that contractual sale restrictions are not part of the security's unit of account and should not be considered in measuring fair value.
Three of the seven FASB board members dissented from this conclusion. They believed that the distinction between asset-specific and entity-specific contractual restrictions is not economically meaningful. In their view, contractual sale restrictions have economic substance that should be reflected in fair value.
Why market participants may value restricted shares differently
Current accounting guidance under ASC 820, Fair Value Measurement, generally requires that shares subject to a contractual sale restriction and otherwise identical shares not subject to such a restriction be measured at the same fair value. Investment companies have noted that this guidance does not reflect how market participants value shares that are subject to contractual sale restrictions, as they cannot sell the equity for a specified period. For investment companies, applying current guidance can overstate net asset value, distort performance reporting and management fees, and create different outcomes between purchasing, redeeming and remaining shareholders.
As companies stay private longer and enter public markets at higher valuations, contractual sale restrictions on recent IPOs and planned offerings may affect equity security values and a fund's NAV.
Valuation specialists point out that equity securities subject to contractual sale restrictions are exposed to liquidity and volatility risks in ways that differ from equity securities that are not subject to such restrictions. They often reflect contractual sale restrictions through a discount for lack of marketability. One common approach is an option-pricing methodology that estimates the economic cost of being unable to sell during the restriction period. Term and volatility are key inputs: Longer restrictions and higher expected volatility generally increase the discount. As the restriction approaches expiration, the DLOM declines, causing the restricted security's fair value to converge with the value of an otherwise identical unrestricted security.
FASB proposes a targeted investment company exception
This divergence between GAAP fair value and market participant economic value has prompted the FASB to fast-track a project to address these concerns.
On July 1, 2026, the FASB issued an
Annual and interim financial statement disclosure would be required for the discount attributable to contractual sale restrictions.
The scope dilemma: looking beyond ASC 946
While the current proposal targets investment companies, it raises a fundamental accounting question: Should the proposed accounting treatment apply to all entities?
FASB also could consider, as a separate project, whether this accounting treatment should extend beyond investment companies. As corporate venture capital activity grows, operating companies may hold the same restricted equity securities as private equity or venture capital funds that apply ASC 946. In theory, the same investment should not have a different fair value solely depending on the holding entity.
When the changes could take effect
If approved, investment companies would be required to apply the changes prospectively to all equity securities as of the date of adoption. Early adoption would be permitted on any date on or after the issuance date of the final standard, for financial statements that have not been issued or made available for issuance.
The unusually brief 15-day comment period, which closed on July 17, 2026, suggests the FASB may move quickly to redeliberate the proposal and finalize the amendments before year-end. As such, the new rules could affect 2026 financial statements.
Investment companies may need to reassess valuation policies, disclosures and financial reporting timelines if the proposal is finalized. Funds with restricted equity positions should consider whether current valuation processes are prepared to quantify and support discounts related to contractual sale restrictions.
