ASU 2026-03: Your Fund Must Now Discount Restricted Shares for Lock-Up Restrictions

Your fund holds 100,000 shares of a company that went public three months ago. The ticker says $40, so your books say $4 million. There is just one problem: a 180-day lock-up agreement means you cannot sell a single share until next quarter — and every prospective buyer knows it. Until recently, GAAP told you to value those shares as if the lock-up did not exist. On September 9, 2026, FASB finalized ASU 2026-03, and that fiction is over for investment companies: if a contractual sale restriction keeps you from selling at the measurement date, your fair value must reflect it, and you must disclose the discount.

This post explains what the new standard requires, why FASB reversed a rule it wrote only four years ago, how to measure a discount the standard deliberately refuses to define, and what your fund should do before the mandatory effective date — including whether early adoption is worth it.

What changed: the lock-up discount is now mandatory​

ASU 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions, creates a narrow exception to Topic 820 for one group: investment companies within the scope of ASC 946, Financial Services — Investment Companies, that hold equity securities measured at fair value and subject to a contractual sale restriction.

If that describes your fund, two things are now required:

1. Reflect the restriction in fair value. When you cannot sell an equity security at the measurement date because of a contractual sale restriction, the fair value must incorporate the effect of that restriction as a discount. The discount is the amount market participants would demand for bearing the risk of being unable to sell during the restriction period — in plain terms, the price of illiquidity.
2. Disclose the discount. You must disclose the amount of the discount attributable to contractual sale restrictions included in the fair value of your equity securities. Funds with several affected holdings apply the existing Topic 820 disclosure-aggregation guidance to decide how much detail to give.

The examples FASB has in mind are familiar to any fund holding freshly public stock: IPO lock-up agreements, market-standoff arrangements, and separately negotiated provisions that temporarily prevent the fund from selling an otherwise transferable equity security. The trigger is practical, not formal: can you sell the shares on the measurement date? If a contract says no, a discount applies.

The timeline gives you room to prepare, but the transition has teeth:

• Effective date: annual reporting periods beginning after December 15, 2027, including interim periods within those annual periods. For a calendar-year fund, that means January 1, 2028.
• Early adoption: permitted on any date on or after September 9, 2026.
• Transition: prospective, applied to all equity securities starting on the adoption date — including shares already under a restriction when you adopt. The adoption adjustment lands in current-period earnings, and you disclose the amount.

That last point is the one to circle. Because existing restrictions are caught on day one, adoption can move reported earnings and net asset value immediately — it is not a change that phases in only with new lock-ups.

Why FASB reversed itself four years later​

To understand why this standard exists, rewind to 2022. ASU 2022-03 clarified that a contractual sale restriction is a characteristic of the holder, not of the security itself, and therefore must be ignored in fair value measurement. Two entities holding the same issuer's stock — one locked up, one free to trade — reported the same fair value: the unrestricted market price. The logic was clean. Fund accountants hated it.

Stakeholders told FASB the answer did not match how market participants actually price restricted shares — nobody pays full ticker price for stock they cannot sell for six months. And the stakes had grown: companies are staying private longer and arriving in public markets at larger valuations, so a lock-up on a freshly public position can now represent a material slice of a fund's portfolio. For investment companies the distortion lands somewhere it hurts: net asset value, and everything NAV feeds — performance reporting, management fees, and shareholder outcomes. An investor redeeming at an NAV that pretends locked-up shares are freely tradable is redeeming at the wrong price.

FASB moved fast by its standards. It issued an exposure draft on July 1, 2026, with comments due July 17; fund-industry groups filed responses within the short window; the Board redeliberated in August and issued the final ASU on September 9. The six-week trip from exposure draft to final standard tells you how settled the underlying economics were. FASB kept the exception narrow — limited to investment companies — rather than rewriting the 2022 rule for everyone.

Who is in scope — and who keeps ignoring restrictions​

Scope is where funds either breathe easy or start a project plan. Three conditions must all hold:

• You are an investment company under ASC 946. Registered funds, business development companies, and private funds that meet the Topic 946 definition are in. If your entity is not an investment company, nothing changes.
• The holding is an equity security measured at fair value. Debt, derivatives, and equity positions you do not carry at fair value are outside the exception.
• A contractual sale restriction prevents sale at the measurement date. The restriction must be contractual — a lock-up, a standoff, a negotiated no-sale clause — and it must actually bind on the date you measure. A lock-up that expired last week is history, not a discount.

Everyone else continues under the 2022 rule: operating companies and other non-investment entities still disregard contractual sale restrictions when measuring equity securities at fair value. That asymmetry is deliberate, and it means two holders of the same restricted shares can now legitimately report different fair values — a fund discounts, a corporate holder does not. If your organization runs both a fund complex and an operating balance sheet, make sure the two valuation policies diverge on purpose rather than by accident.

How to measure a discount FASB refused to define​

Here is the part that sends valuation committees the longest memo: FASB prescribed no model and no standard haircut. Choosing and documenting a methodology that captures market-participant assumptions about liquidity risk is management's responsibility, and auditors, regulators, and investors will all expect to see the work.

In practice, funds will reach for the established discount-for-lack-of-marketability toolkit:

• Option-pricing models. The two workhorses price the restriction as the cost of insuring against it. The Chaffe protective-put approach values the discount as an at-the-money European put expiring when the restriction lifts — the price of buying back the marketability you gave up. The Finnerty average-strike approach refines this with an Asian-style put keyed to the average price over the restriction period, on the theory that you have no special ability to time a sale. Both take the same inputs your auditors will ask about: the remaining restriction period, the stock's volatility, the dividend yield, and the risk-free rate.
• Empirical restricted-stock studies. Decades of studies compare prices of restricted placements against their freely tradable counterparts. They are a useful reasonableness check, though modern valuation practice leans more on models calibrated to the specific restriction than on averages from old transactions.

Whatever method you choose, three properties should hold. First, the discount must move with its drivers: a 180-day lock-up on a volatile small-cap demands more than a 30-day standoff on a blue chip, and a flat firm-wide haircut will not survive an audit. Second, it must decay as expiry approaches — the same shares are worth more, all else equal, one week before release than five months before. Third, it must be documented position by position: identify each restriction, its remaining duration, the methodology and inputs used, and the resulting discount, in valuation committee materials an outsider can follow.

One more expectation to set with your board: this is a recurring measurement, not a one-time adoption exercise. Every reporting date re-asks the question for every restricted holding until the restriction lifts.

What adoption does to your NAV, your fees, and your books​

Walk through the economics with a simple position. Your fund holds 10,000 shares of a locked-up issuer at a $40 quoted price — $400,000 unrestricted. Your valuation model produces an 8 percent discount for the remaining 150-day lock-up, so fair value is $368,000 and the adoption adjustment is a $32,000 reduction. In a plain-text ledger, adoption day looks like this:

2026-01-01 open Assets:Investments:Restricted-Equity USD
2026-01-01 open Expenses:Unrealized-Losses USD
 
2026-09-30 txn "Adopt ASU 2026-03 - DLOM on locked-up shares"
  Assets:Investments:Restricted-Equity  -32000.00 USD
  Expenses:Unrealized-Losses  32000.00 USD

The entry is simple; its downstream effects are not. That $32,000 reduces NAV on the adoption date, and NAV is the number everything else keys off:

• Management fees. If your advisory agreement computes fees on NAV or managed assets, discounted holdings lower the fee base. Read the agreement's valuation definitions now — some define NAV by reference to GAAP financial statements (which will move), others by a bespoke calculation (which might not, until someone amends it).
• Performance and incentive allocations. A prospective adoption adjustment hits current-period earnings, which can dent a reporting period's return and any performance fee or carried-interest calculation tied to it. General partners adopting early in a strong year versus a weak year will tell different stories.
• Waterfalls and investor reporting. Distribution waterfalls, equalization, and redemption pricing all consume NAV. Coordinate with your administrator so the fund's official books, the administrator's records, and investor statements all adopt the same discount on the same date — a fund that discounts in its financial statements but redeems investors at undiscounted NAV has built itself a dispute.

None of this is a reason to dread the standard; a redeeming shareholder was previously transacting at an NAV that overstated what the fund could actually realize. But the transition concentrates the correction on one date, so plan the communication before the numbers move.

What to do before 2028​

You have until the 2028 reporting year — sooner if you early-adopt — and the work breaks into five tasks:

1. Inventory every restricted holding. List each equity position under a contractual sale restriction, the restriction's terms, and its expiry. Include side letters and negotiated provisions, not just IPO lock-ups. Quantify the rough exposure so the board sees the adoption-day NAV effect before it happens.
2. Select and document a valuation methodology. Pick your model, lock down input sources (whose volatility estimate? which risk-free curve?), and write the policy so it specifies drivers rather than outcomes. Have the conversation with your auditors before you run the first calculation — a methodology they bless in advance is worth three they review after the fact.
3. Update policies, controls, and systems. Valuation policies, pricing-oversight controls, administrator instructions, and NAV worksheets all need the new step: identify restriction, measure discount, disclose. If your administrator prices the portfolio, confirm whose model governs and who signs off.
4. Decide on early adoption deliberately. Adopting early — any date from September 9, 2026 — lets you spread the communication across a quieter period and present cleaner year-over-year comparatives in 2028. But it also moves NAV now, in a period your investors did not expect to move. Make it a committee decision with the fee and performance effects modeled, not a default.
5. Prepare the disclosure. Draft the discount disclosure and the adoption-amount disclosure early, and decide the aggregation level for multiple holdings. Investors comparing funds will read these footnotes side by side; a clear table beats a dense paragraph.

Start with the inventory. Pull every holding with a contractual sale restriction this month, note each expiry date, and estimate the discount range — that single schedule turns ASU 2026-03 from an abstract standard into a dated to-do list with a dollar amount on it, and everything else on the plan follows from there.