Financial Reporting
ASU 2026-03 Is Final: The Lock-Up Discount Decision Funds Face at Quarter-End
ASU 2026-03 is final. Funds holding locked-up IPO shares can adopt from the September 30 quarter-end: what the discount is, the dates, and how to decide.
By 409.AI Team - 2026-09-30
# ASU 2026-03 Is Final: The Lock-Up Discount Decision Funds Face at Quarter-End
Your fund's biggest position went public in June. The lock-up runs until December. Today is September 30, the quarter closes, and your auditor's first question in January will not be about the price. It will be about whether you adopted the new standard, and why.
In [August we wrote about the FASB's July proposal](https://409.ai/articles/fasb-2026-contractual-sale-restrictions-asc-820-lock-up-discount) to let funds discount locked-up shares again. On September 9, 2026 the FASB issued the final version as [Accounting Standards Update 2026-03](https://storage.fasb.org/ASU%202026-03.pdf), Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions. The mechanics survived the comment period largely intact. What changed is that the decision is now yours to make, and the first reporting date on which you can make it is this one.
This post is written for the fund CFO, controller or administrator who has to decide, and for the auditor who will ask.
What the final standard does
Since ASU 2022-03, GAAP has treated a contractual sale restriction on an equity security as a characteristic of the holder, not of the security. A locked-up share was worth the closing price in the fund's books, full stop, however many months the fund was forbidden from selling it. Funds pushed back for four years, and the FASB carved out an exception for them.
Under ASU 2026-03, an investment company within the scope of ASC 946 must consider a contractual restriction that prohibits the sale of an equity security when it measures that security's fair value. [Deloitte's Heads Up on the standard](https://dart.deloitte.com/USDART/home/publications/deloitte/heads-up/2026/fasb-asu-contractual-sale-restrictions) puts the mechanism in one sentence: the effect of the restriction is incorporated by applying a discount, and the discount reflects the amount that market participants would demand as a result of the risk associated with being unable to sell the equity security during the specified restriction period.
Two boundaries matter.
First, the exception is for investment companies only. Every other entity keeps ASU 2022-03 and keeps ignoring the restriction. Deloitte's summary is explicit that entities other than investment companies continue to treat the sale restriction as a characteristic of the reporting entity and do not consider it in measuring fair value. The operating company whose shares you hold does not get a discount in its own statements, and neither does a corporate venture arm that is not an investment company.
Second, the discount is disclosed, not buried. The [Journal of Accountancy's report](https://www.journalofaccountancy.com/news/2026/sep/fasb-updates-investment-company-fair-value-reporting-standard/) notes that the amendments require those investment companies to disclose the amount of the discount attributable to the contractual sale restriction. That sits on top of the disclosures ASC 820-10-50-6B already required for restricted securities: the fair value of the restricted position, the nature and remaining duration of the restriction, and the circumstances that could cause it to lapse.
The dates, and why they make this a quarter-end problem
The standard is effective for annual reporting periods beginning after December 15, 2027, including interim periods within those years. For a calendar-year fund that means the 2028 financial statements.
Early adoption is permitted in an interim or annual reporting period on any date on or after the issuance date. Issuance was September 9. So September 30, 2026 is the first quarter-end on which a fund can elect to apply it.
Transition is prospective. The amendments apply to all equity securities, including those already subject to a restriction on the adoption date, and any adjustment that results from adoption is recognized in current-period earnings on the date the fund first applies the amendments. That adjustment is itself disclosed in the period of adoption.
Put those three facts together and the shape of the decision appears. Adopting early is not a footnote change. In the quarter you adopt, every locked-up position in the book takes its discount through the income statement at once, and the amount is printed. Waiting means carrying the quoted price for up to two more years while disclosing, in words, that you could not sell.
Adopt now, or wait
There is no default answer, and the standard does not push you toward one. The questions below are the ones an audit committee will want answered either way.
How much of the book is inside a lock-up right now? A fund with one newly public position and a lock-up expiring in December faces a small, short-lived discount. A crossover fund with several 2026 IPOs still inside their windows faces a material one. The [SEC counted 208 IPOs in the first half of 2026](https://www.sec.gov/newsroom/press-releases/2026-93-sec-publishes-updated-market-statistics-highlighting-increase-ipos-proceeds-raised), against 180 a year earlier, so more funds hold locked-up public stock at this quarter-end than at almost any recent one.
Whose numbers move? NAV moves, so the management fee base moves if the fee is charged on net assets. Performance for the quarter moves, and it moves in one direction on the adoption date. LP reports that compare this quarter to last will carry a change that has nothing to do with the companies. Waiting keeps comparability; adopting keeps the fund closer to what it could realize.
What will the auditor test? Under either choice the auditor will test that you applied the right standard. If you adopt, the auditor will test the discount: its inputs, its method and the support for both. If you wait, the auditor will test that you did not quietly take a discount anyway and that the restriction disclosures are complete. The path with less audit work is the one you can document better, not necessarily the one with the smaller number.
What have your peers done? Funds that report to the same LPs will face the same question in the same quarter. There is no rule that says a fund has to match its peers, but an LP comparing two funds holding the same stock will notice when one carries it at $24 and the other at $22.
Sizing the discount
The standard defines the discount by what market participants would demand for the inability to sell during the restriction period. It does not hand you a percentage. In practice a valuation specialist will look at the length of the remaining restriction, the volatility of the stock, the depth of its trading and evidence from restricted-stock and option-based models, and will document why the chosen figure fits this position at this date. The discount for four months left on a lock-up is not the discount for eleven months, and neither is the discount for a thinly traded small-cap the same as for a large, liquid listing.
Here is the arithmetic from the August article, updated to the final rule. It is an illustrative example, not a recommendation of a rate.
Suppose the fund holds 2,000,000 shares of a company that trades at $24 on September 30, with 120 days left on a 180-day lock-up. Without adoption the position is carried at $48,000,000. If the fund adopts and the analysis supports an 8% discount for the remaining period, the position is carried at $44,160,000 and the fund discloses a $3,840,000 discount. On a fund charging 2% of net assets, that discount is roughly $77,000 a year of fees no longer computed on value the fund cannot access. When the lock-up expires the discount goes to zero and the position returns to the quoted price, so the effect reverses on its own by the following quarter-end.
Whether 8% is right for your position is exactly the question the auditor will ask, which is why the method needs to be written down before the number is.
The disclosure you will write either way
If you adopt, the notes carry the amount of the discount attributable to sale restrictions that is included in the measurement, the adoption adjustment recognized in the period, and the existing restricted-securities disclosures: fair value of the restricted position, the nature and remaining duration of the restriction and the conditions that could cause it to lapse.
If you wait, the notes still carry the restricted-securities disclosures. The difference is that the restriction is described but not priced.
The mistake to avoid is the middle path: a discount taken "informally" through a valuation input without adopting the standard. Under ASU 2022-03 that was never permitted, and under ASU 2026-03 it is permitted only through adoption, with the disclosure that comes with it. A discount that shows up in the number and not in the notes is the finding every auditor is now primed to look for.
What this does not change
Nothing here touches the portfolio company's own accounting or its option pricing. The company's financial statements are not investment-company statements, so ASU 2022-03 still governs them. Its 409A valuation, and the strike prices set from it, are set under the fair market value standard in the Section 409A regulations, in a valuation the company commissions for its own grants. A fund writing down a locked-up position does not reset that number. Founders who want the mechanics of the company side, including what the SEC staff looks for in pre-IPO grants, can start with our piece on [cheap stock and the pre-IPO 409A](https://409.ai/articles/cheap-stock-pre-ipo-409a-sec-option-grants) and the one on [double-trigger RSUs at the IPO](https://409.ai/articles/double-trigger-rsus-ipo-taxation-409a).
The same separation holds inside the fund's own book. The lock-up discount is a fair value adjustment on a quoted security. Your private positions are still Level 3 marks built the way we described in [how funds mark their startup positions](https://409.ai/articles/asc-820-level-3-fair-value-fund-portfolio-valuation), and the classification rule from [one unobservable input puts the whole measurement in Level 3](https://409.ai/articles/asc-820-level-3-classification-significant-unobservable-input) applies to them, not to the discount. Where a locked-up public share sits in the hierarchy once it carries a discount is a classification question in its own right; the auditor will want you to say which level, and why.
A short list for this week
If you hold any newly public shares inside a restriction at September 30, five things belong on the close checklist.
1. List every restricted position with the restriction's expiry date and the shares covered. The disclosures need the remaining duration whether or not you adopt. 2. Decide adopt or wait with the audit committee, and record the reasons. The decision date matters because transition is prospective from the date you first apply the amendments. 3. If you adopt, fix the discount method in a memo before the number is calculated, and keep the market-participant reasoning in it. 4. Draft the note: the amount of the discount, the adoption adjustment, and the restricted-securities disclosures. 5. Tell your LPs what changed and why the quarter's NAV moved, before they read it in the statements.
If the decision is to adopt and the fund needs an independent measurement it can put in front of an auditor, that is the work 409.AI's [ASC 820 valuation service](https://409.ai/products/asc-820) is built for. Either way, the standard has given funds back a number closer to what they could sell at. The only thing it asks in return is that the number be explained.