Financial Reporting

What a Private Fund's Level 3 Footnote Must Say, and What ASU 2018-13 Let You Drop

Fund CFOs and controllers: what a nonpublic fund's Level 3 footnote must include after ASU 2018-13, which disclosures you can drop, and how to tie it out.

By 409.AI Team - 2026-10-11

# What a Private Fund's Level 3 Footnote Must Say, and What ASU 2018-13 Let You Drop

Your fund's year-end audit is three months away, and the draft financial statements usually start with last year's footnotes. That is where a controller can lose a week. The fair value footnote of a private fund changed in 2020, and plenty of templates still carry disclosures that nonpublic entities no longer owe, while skipping two that they do.

This guide is for the fund CFO, controller or administrator who assembles the Level 3 note for a venture or private equity fund, and for the auditor who reads it. It walks through what ASU 2018-13 removed, what it changed for a nonpublic entity, and what a good Level 3 note still contains.

Why the footnote matters more than its length

Most of a venture fund's portfolio sits in Level 3, because the inputs that matter (a calibrated discount rate, a revenue multiple adjusted for size, a probability of an exit) are unobservable. We explained how one such input pulls a whole measurement down to that level in [One Unobservable Input Puts Your Entire ASC 820 Measurement in Level 3](https://www.409.ai/articles/asc-820-level-3-classification-significant-unobservable-input).

The number on the balance sheet is only half of what an auditor tests. The other half is whether a reader of the statements can see how much of the fund's net assets rests on judgment. The Level 3 note is that view. A limited partner who never sees your valuation file sees only this page.

What ASU 2018-13 changed

FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework, to trim and sharpen the disclosures in ASC 820. It took effect for fiscal years beginning after December 15, 2019, so every private fund with a December 2020 year-end or later is already inside it. Deloitte's summary of the standard is the clearest map of who owes what: [Deloitte, FASB Issues Standard to Amend Required Fair Value Measurement Disclosures](https://dart.deloitte.com/USDART/home/publications/archive/deloitte-publications/heads-up/2018/fasb-issues-standard-amend-required-fair).

The standard sorts entities into two groups: nonpublic entities and everyone else. A private fund that does not file with the SEC and has no publicly traded securities falls on the nonpublic side. That matters because several of the new requirements stop at the line.

What was removed

Four removals touch a fund's note.

  • **The Level 3 valuation process description** (the old ASC 820-10-50-2(f)). Gone for every entity. Many fund notes still carry a paragraph on the valuation committee and its quarterly cycle. It is no longer required.
  • **The Level 3 earnings line for nonpublic entities.** Nonpublic entities no longer disclose the unrealized gains and losses in earnings for Level 3 positions still held at the reporting date (ASC 820-10-50-2(d)). Your statement of operations still reports the change in unrealized appreciation. Only the separate disclosure went away.
  • **The timing-of-transfers policy** between levels.
  • **Estimates of when NAV-based investments could be liquidated,** replaced by a narrower rule described below.

What was modified for a nonpublic entity

The full Level 3 rollforward, the opening balance walked to the closing balance, no longer applies to a nonpublic entity. It discloses two things instead:

1. Purchases and issues of Level 3 assets and liabilities, each type shown separately. 2. Transfers into and out of Level 3, each type shown separately, with the reasons.

So a fund that builds a rollforward by habit can stop. A fund that holds the positions in the schedule of investments and keeps a clean trade log already has the purchase figures. The transfers need more care, and the reasons need words.

What was added, and who it does not reach

The new requirements to disclose the range and the weighted average of significant unobservable inputs, and to describe how the weighted average was computed, apply to entities other than nonpublic ones. The same is true of the narrative about how measurement uncertainty from unobservable inputs "could have been different at the reporting date." Nonpublic entities are not required to apply them. A nonpublic fund does still give quantitative information about the significant unobservable inputs it used, under ASC 820-10-50-2(bbb), without the range-and-average format.

Confirm the reach of each paragraph against the codification with your auditor before you cut a template. The summary above comes from published reads of the standard, and your firm's reading of the paragraphs controls.

The rule for NAV-based investments

Funds of funds and funds with LP stakes use net asset value as the practical expedient. The standard kept the disclosure but changed one piece. The fund discloses the timing of the investee's liquidation of its assets, and the date on which redemption restrictions might lapse, only if the investee has communicated the timing to the fund or announced it publicly. If the timing is unknown, the note says that. It no longer asks the fund to estimate.

For the conditions that decide whether the expedient is available in the first place, read [When a Fund Can Use a Manager's NAV as Its Mark](https://www.409.ai/articles/nav-practical-expedient-asc-820-fund-of-funds-lp-interest-marks).

A worked example

Take an illustrative venture fund, Fund IV, with a December 31 year-end and these Level 3 facts:

| Item | Amount (illustrative) | |---|---| | Opening Level 3 fair value | $82.0M | | New follow-on and initial investments | $14.5M | | Transfers into Level 3 | $0 | | Transfers out of Level 3 (one company went public, shares unrestricted) | $6.2M | | Closing Level 3 fair value | $91.4M |

Under the old full rollforward, the note walked $82.0M to $91.4M with every gain, loss and sale on the page. For a nonpublic entity the requirement now reads differently: purchases of $14.5M, a transfer out of $6.2M, and the reason, which is that the position gained an observable quoted price. The difference between those lines and the closing balance (appreciation, distributions, realized exits) is real, but the standard no longer asks you to show it in the fair value note.

Two cautions. First, the transfer is a good example of why the reason matters. A reader should be able to tell that $6.2M left Level 3 because the position now trades, not because someone reclassified a hard-to-value holding. Second, the transfer and the date of measurement interact: a company that lists on January 15 stays in Level 3 at December 31, and the lock-up question in [FASB's 2026 proposal on restricted shares](https://www.409.ai/articles/fasb-2026-contractual-sale-restrictions-asc-820-lock-up-discount) can change how a post-IPO position is measured.

What a good Level 3 note still contains

With the removals taken out, a nonpublic fund's Level 3 content should still cover:

  • **The hierarchy table.** Each class of investment by level, with NAV-measured investments shown separately as the codification requires.
  • **Valuation techniques.** For each class, the technique (market approach with a revenue multiple, an OPM backsolve to a recent round, an income approach) and any change in technique with the reason. A change from "recent round" to "market approach" is the change auditors ask about first.
  • **Quantitative information on significant unobservable inputs,** by class, in whatever format conveys it. The range-and-average format is not mandatory for a nonpublic fund, but a table of inputs is still the easiest way to give the information.
  • **Purchases and issues, and transfers in and out with reasons,** as described above.
  • **The NAV disclosures,** limited to what the investee has communicated.

Notice what the list leaves out: the valuation committee narrative and the unrealized-gains-in-earnings line. If your auditor or your limited partner agreement asks for them anyway, include them. The standard just no longer makes you.

The audit angle

The note is where the audit file and the statements meet. Auditors test the disclosed inputs against the support, so every figure in the input table needs a home in the valuation file. The point is the same one made in [Nobody Makes You Disclose Your Valuation Policy. Your Auditor and the SEC Still Read It.](https://www.409.ai/articles/fund-valuation-policy-asc-820-audit-sec-exam): what the note says and what the file shows must agree. And because many advisers run on the custody rule's audit timetable, the note competes for time with everything else in [Back-Planning Your Year-End Marks From April 30](https://www.409.ai/articles/custody-rule-120-day-audit-deadline-fund-year-end-marks).

A short checklist for December:

1. Pull last year's note and mark every sentence as required, optional or obsolete under ASU 2018-13. 2. Rebuild the purchases and the transfers schedule from the trade log, and write the reason for each transfer in a sentence. 3. Tie every input in the table to the model that produced it. 4. Ask the NAV investees whether they have communicated liquidation timing, and record the answers. 5. Agree the entity-type conclusion (nonpublic or not) with your auditor in the planning meeting, not at the draft stage.

The takeaway

Most of the work in a Level 3 note comes from carrying forward text nobody needs and missing the two schedules somebody does. Decide in October which disclosures your fund owes, build the purchases and transfers schedule while the trades are fresh, and the December footnote becomes a tie-out exercise instead of a rewrite. If your portfolio needs independent support for the marks behind that note, [409.AI's ASC 820 valuation service](https://www.409.ai/products/asc-820) delivers expert-reviewed reports built for the auditor's file.

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