ASU 2026-03: Implementation Guide for Investment Companies Addressing Contractual Sale Restrictions

Which Investments Should Investment Companies Review?

The first step is identifying investments that could fall within the scope of the new requirements.

Investment companies may want to review their portfolios for equity securities subject to contractual provisions that limit or delay the holder's ability to sell the investment. Examples may include:

• Pre-IPO or privately issued equity securities subject to lock-up arrangements.
• Equity securities subject to contractual market-standoff provisions.
• Securities with specified periods during which transfers or sales are restricted.
• Other equity investments where a contractual agreement limits the holder's ability to sell the security.

The existence of a contractual restriction does not, by itself, establish a predetermined valuation discount. Instead, the investment company must consider the effect of the restriction on the fair value measurement in accordance with the applicable fair value framework. This makes the investment-level facts and circumstances particularly important.

Valuation: What Should Management Consider?

ASU 2026-03 does not establish a single discount percentage that applies to all restricted equity securities.

Instead, management and valuation professionals will need to consider the characteristics of the investment and the contractual restriction when determining the appropriate fair value.

Relevant considerations may include:

• The remaining duration of the restriction.
• The nature and terms of the contractual restriction.
• Whether the restriction can be transferred or otherwise modified.
• The liquidity characteristics of the underlying security.
• Expected market volatility.
• The likelihood and timing of a liquidity event.
• Relevant market-participant assumptions.
• Other facts and circumstances specific to the investment.

The objective is not simply to apply a standard "lock-up discount." The valuation analysis should demonstrate why the restriction affects the price that a market participant would consider in determining fair value.

Why Documentation Will Matter

One of the most important implementation considerations may be the documentation supporting the valuation conclusion.

For each material restricted equity investment, an investment company should consider maintaining documentation that clearly connects:

Contractual restriction → valuation analysis → fair value conclusion → financial statement disclosure

Documentation may include the underlying agreement, restriction period, relevant investment characteristics, valuation methodology, significant assumptions, supporting market data and management's conclusion regarding the effect of the restriction.

A consistent documentation framework can also make the valuation process easier to review during the audit.

Potential Effects on NAV

For investment funds that calculate NAV based substantially on fair value measurements, changes in the valuation of restricted equity securities can affect reported NAV.

Depending on the fund's structure and governing agreements, the resulting NAV impact could have downstream consequences for matters such as:

• Investor subscriptions and redemptions.
• Performance reporting.
• Management fees.
• Incentive or performance allocations.

Investor statements and capital account reporting. The actual impact will depend on the fund's portfolio, valuation conclusions and governing arrangements. Investment companies should therefore consider the effect of the new guidance at both the investment level and fund level.

Financial Statement Disclosure Considerations

The new guidance also brings additional disclosure considerations. Investment companies should prepare to identify and support the amount of any discount attributable to contractual sale restrictions that is reflected in the fair value measurement.

These considerations can help managers identify potential gaps before they become issues during an audit, investor review, fundraising process, or regulatory examination.

Management should also consider how the new information interacts with the fund's existing fair value disclosures, including disclosures concerning restricted securities and the nature and duration of applicable restrictions.

This means implementation should involve both the valuation and financial reporting teams rather than treating the change solely as a valuation exercise.

What Should Investment Companies Do Before Adoption?

Investment companies can begin preparing by performing a structured review of their current processes.

1. Identify affected investments

Create an inventory of equity securities that are subject to contractual sale restrictions and determine which investments fall within the scope of the new requirements.

2. Review contractual terms

3. Evaluate existing valuation methodologies

4. Establish a consistent framework

5. Strengthen valuation documentation

6. Assess NAV implications

7. Review financial statement disclosures

8. Coordinate with auditors

Discuss the planned implementation approach and supporting documentation with the fund's auditors before adoption to identify potential audit evidence requirements.

Questions Investment Managers Should Be Asking

As part of their implementation planning, investment managers may want to consider:

• Which portfolio investments contain contractual sale restrictions?
• Are those restrictions currently reflected in our valuation process?
• Do our valuation policies clearly address these situations?
• What evidence supports the effect of a restriction on fair value?
• Are our valuation models and assumptions sufficiently documented?
• How could revised fair values affect NAV?
• Will our financial statement disclosures need to change?
• Can our existing accounting and valuation systems capture the required information?
• What documentation will our auditors expect?
• Do different investment teams currently apply different approaches to similar restrictions?

Answering these questions early can help identify process gaps before the new requirements become part of the regular financial reporting cycle.

What This Means for Fund Valuation and Audit Teams

For valuation teams, the primary challenge may be developing a repeatable process for evaluating contractual restrictions without reducing the analysis to a standardized discount.

For accounting teams, the focus may be on determining how valuation conclusions flow into NAV and financial reporting.

For audit teams, supporting evidence around the valuation methodology, contractual terms, assumptions and resulting fair value may become an important part of the audit process.

Coordination among these functions can help investment companies establish a more consistent and supportable implementation process.

How Akram Can Help

Akram | Assurance, Advisory & Tax works with alternative investment managers on valuation, assurance, tax and financial reporting matters.

Our team can assist investment companies with the practical implications of ASU 2026-03, including:

• Valuation support: Evaluating contractual sale restrictions and supporting fair value methodologies and conclusions.
• NAV and financial reporting: Evaluating potential effects on NAV calculations and related financial reporting.
• Disclosure support: Helping management identify and prepare relevant fair value disclosures.
• Implementation advisory: Reviewing existing policies, controls and processes and identifying areas that may require enhancement.