ASC 820: A fund’s guide to fair value measurement

What is ASC 820?

ASC 820 is the Financial Accounting Standards Board’s (FASB) accounting standard that establishes the framework for defining, measuring, and reporting the fair value of investments. By standardizing how fair value is measured and disclosed, ASC 820 ensures financial statements provide stakeholders, investors, regulators, and decision-makers with reliable details about a company’s assets, financial liabilities, and equity. In the United States, ASC 820 is part of the Generally Accepted Accounting Principles (GAAP) guidance. International Financial Reporting Standard (IFRS) 13 is the corresponding standard that applies for fair value for the rest of the world.

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, known as the exit price. This may be different from the price you originally paid for the investment, or the entry price, and it gives limited partners (LPs) a current, market-based view of their investment's performance.

The way fair value is calculated can vary by investment type, including:

• Market-based: Fair value is determined by the market perspective, not the reporting entity.

• Exit price: Fair value is measured at the price an asset can be sold, separating it from the entry price, transaction price, or initial acquisition cost.

• Principal market: Fair value assumes transactions occur in the market with the greatest volume or activity for the asset or, in its absence, the most advantageous market, which maximizes value for the entity.

The standard also requires you to adopt the perspective of market participants, who are hypothetical, independent, and knowledgeable buyers and sellers in the principal market for an asset. This means your valuation must reflect how the broader market would price an asset, taking into account any restrictions on the sale or use of the asset that a market participant would consider. This market-based approach is designed to produce a valuation that is objective and defensible; for instance, any discount applied due to a contractual sale restriction is considered inconsistent with the standard, making the valuation less susceptible to entity-specific biases.

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Why is it important to understand ASC 820?

For fund managers, ASC 820 provides a consistent, industry-wide standard for valuing investments, which is a critical foundation of accurate and transparent portfolio valuation. This standard ensures that all parties, from general partners (GP) to LPs and auditors, are speaking the same language when it comes to an asset's worth.

The ASC 820 fair value hierarchy

ASC 820 categorizes assets into a three-level fair value hierarchy based on their liquidity. The more liquid an asset, the easier it is to determine its value. This hierarchy is important because it determines the amount of judgment required for a valuation and signals the level of scrutiny you can expect during an audit and from LPs. The higher the level, the more observable the inputs and the more reliable the valuation is considered to be.

Level 1: Direct market prices

• Definition: Uses quoted prices from active markets for identical assets

• Example: Publicly traded stocks on the New York Stock Exchange (NYSE) or exchange-traded funds (ETF)

These are the most reliable valuations because they are based on unadjusted quoted prices in active markets for identical assets. Think of publicly traded stocks in your portfolio where a price is readily available on an exchange like the NYSE or NASDAQ.

For most venture capital (VC) and private equity (PE) funds, Level 1 is the least common category for their core portfolio company (portco) investments. These funds overwhelmingly invest in illiquid private companies, which can take many years to generate returns, making publicly-traded Level 1 assets a rarity in their portfolios. For example, even among funds from the 2019 vintage, 63% had yet to generate any distributions for their LPs as of early 2025—a sign of how hard-to-find liquidity is. This focus on long-term, illiquid investments is why the more complex Level 2 and 3 assets make up the vast majority of fund holdings.

Level 2: Observable market data

• Definition: Uses pricing inputs other than direct quotes from active markets. These inputs are observable, including quoted prices for similar items or derived values from market data.

• Example: Interest rate swaps valued on yield curves and a privately held call option of a publicly listed company.

These valuations use observable inputs other than the Level 1 quoted prices. This could mean using prices for similar assets in active markets, or using market-corroborated data like a yield curve to value an interest rate swap. There is more estimation involved than in Level 1, but the inputs are still tied to observable market data, providing a degree of objectivity.

Level 3: Unobservable inputs

• Definition: Based on pricing inputs not readily observable in the market. These involve internal methodologies relying on management’s best estimate of fair value.

• Example: Preferred stock in a private company.

These valuations rely on unobservable inputs and use your own assumptions about what market participants would use to price an asset. The value of most private company investments falls into this category, as a fund’s total value to paid-in capital (TVPI) is often heavily reliant on unrealized marks. This makes Level 3 the most challenging and scrutinized area of valuation, especially as market shifts can create a scarcity of observable inputs. For example, in 2023, the median early-stage and late-stage valuations fell to three- and five-year lows, respectively, increasing reliance on unobservable, internal assumptions.

This level requires significant judgment in selecting the appropriate valuation technique based on the portco’s maturity and in navigating the challenge of limited information rights. This is a common issue when the fund manager doesn't have a board seat or full access to the portco's internal data. As a result, Level 3 valuations demand careful documentation.

The American Institute of Certified Public Accountants (AICPA) released guidance around how best to value a Level 3 asset in mid-2019. Though the AICPA generally provides guidance in line with GAAP, the ASC 820 guidance was written to converge GAAP and IFRS.

How to select and apply ASC 820 valuation methodologies

Since a fund manager’s portfolio is composed primarily of assets classified as Level 3, understanding the accepted valuation methodologies is the practical core of applying ASC 820. This is the playbook for tackling the main challenge: how do you assign a credible value to an illiquid, private company investment? A company’s enterprise value is an estimate of its total worth, taking into account its equity value, debt, and cash balance. The ASC 820 standard outlines three primary valuation approaches that serve as your toolkit for determining a portco’s total enterprise value:

Market approach

The market approach is often the most practical starting point for VC and PE funds, especially when calculating the value of unrealized gains in a portfolio. To do this, fund managers typically mark the value of a company against the known valuation of other comparable companies in the market, using the logic that a company’s closest peers are a good proxy for its own value.

Market approach methods rely on observable market indications to arrive at the enterprise value of the portco. This method may be best for companies that cannot accurately predict long-term future performance or those that have not completed a round of financing within the last 12 months. They include:

1. Guideline public company (GPC) method: Uses a list of reasonably comparable public companies (in terms of size, revenue model, and target audience) and examines the implied multiples of relevant financial metrics to arrive at an enterprise value of the portco.

2. Guideline transaction method: Looks at recent mergers and acquisitions of reasonably comparable target companies and examines the implied multiples of relevant financial metrics to arrive at an enterprise value of the portco.

3. Backsolve or post-money valuation method: Relies on the portco most recent equity financing round to determine the value of the portco.

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Income approach

The income approach, often executed as a discounted cash flow (DCF) analysis, is another common methodology that focuses on a company's ability to generate future economic benefits. This method requires you to build defensible financial projections, often based on metrics like annual recurring revenue (ARR), for the portco and select an appropriate discount rate to account for the risk of achieving those projections. This approach is generally more suitable for mature, late-stage portfolio companies that have a stable operating history and predictable cash flows, making future projections more reliable.

Asset approach

The asset approach determines the value of a portco based on the value of the company’s net assets minus its liabilities. This approach may be appropriate for very early-stage companies with a simple capitalization structure and few intangible assets, or a company that is facing liquidation and whose value is primarily in its tangible assets.

The asset approach is used less frequently for valuing ongoing, high-growth companies because it often fails to capture the value of intangible assets like intellectual property, brand recognition, and growth potential.

How to allocate enterprise value across complex capital structures

Determining the total enterprise value is only the first step. The critical next step is to allocate that value across the different securities and share classes on the company's capitalization table. Because your fund likely holds preferred stock with specific economic rights, such as a liquidation preference, you cannot simply divide the enterprise value by the total number of shares to find the per-share value.

The allocation methodology must account for the different rights and preferences of each share class to arrive at a defensible fair value for your specific investment. This can be done using four potential allocation methods:

Option pricing model (OPM)

The option pricing model (OPM) is a common allocation method for early-stage companies where the path to a future exit is uncertain. The OPM accounts for the economic rights of preferred shares, such as liquidation preferences and conversion rights, as well as the anticipated exit timeline and market volatility when considering a continuous distribution of outcomes, ensuring that the waterfall structure of the cap table is respected in the valuation.

Probability-weighted expected return method (PWERM)

The probability-weighted expected return method (PWERM) is a more complex model better suited for later-stage companies with more defined exit possibilities. This method involves modeling discrete future outcomes, such as an initial public offering (IPO), a merger, or a dissolution, and assigning a probability to each scenario. The value is then allocated across the share classes in each scenario and weighted by the probability to arrive at a fair value for each security, providing a more nuanced valuation for companies closer to an exit.

Waterfall method

The waterfall method accounts for the rights and liquidation preferences of the equity holders. It may be a good option if the company has a complex cap table and there is visibility into a near-term acquisition.

Free waterfall modeling glossary

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Common stock equivalent (CSE)

The CSE moves away from the consideration of rights and preferences, instead allocating value to equity holders assuming all preferred shares have converted to common shares. This allocation method is typically used in conjunction with the post-money method or when a company is nearing an IPO.

Qualitative considerations

While valuation models provide a quantitative framework, the final fair value assessment for Level 3 assets must incorporate qualitative factors and management's judgment. This is particularly crucial for emerging managers or those with limited information rights to a portco, where relying solely on limited historical data can be misleading. Fund managers must consider (and rigorously document) the following:

• Market and economic climate: How have recent macroeconomic changes, sector-specific performance, and overall market volatility impacted the portco's projected performance or valuation multiples?

• Company-specific events: Have there been any recent material events, such as key personnel changes, litigation, loss of a major customer, or significant shifts in product adoption, that the valuation model might not fully capture?

• Financing and liquidity: What is the company's current cash runway, and are there any anticipated financing needs that could lead to a down round or significant dilution?

• Comparable transaction scrutiny: How truly “comparable” are the market transactions or public companies being used? Are the data points recent, or are they from a materially different market environment?

Auditors mostly care about documenting these considerations, since this non-numerical justification backs up the quantitative fair value mark.

ASC 820 disclosure requirements

ASC 820’s disclosure requirements report the valuation techniques and inputs used for fair value measurements in financial reporting. Important disclosure requirements include:

• Fair value measurement by level: Entities must categorize assets and liabilities into Level 1, Level 2, or Level 3 of the fair value hierarchy and the amounts within each level.

• Changes in Level 3 investments: Entities must disclose purchases, conversions and any transfers in or out of Level 3.

• Valuation techniques: Entities must disclose the valuation approach (market, income, or cost approach) used for Level 2 and Level 3 measurements and the inputs applied, like discount rates, yield curves, or price multiples.

• Level 3 measurement details: Entities must provide detailed quantitative disclosures about unobservable inputs used in the valuation, and a description of the process for developing unobservable inputs.

• Changes in valuation technique: Entities must disclose changes in valuation approach or technique for Level 2 and Level 3 that occurred over the reporting period.

• Nonrecurring fair value measurements: For assets measured on a nonrecurring basis, entities must disclose the reasons for the measurements, the fair value hierarchy level, and the valuation techniques used.

• Impact of market conditions: Entities must disclose the effect of market conditions, like volatility or illiquidity, on fair value measurements.

What type of valuation do I need?

If you’re a VC, PE, hedge fund, or insurance company reporting under U.S. GAAP, you’re expected to measure the fair value of each investment at every financial reporting period. When positions aren’t traded in an active market, arriving at a defensible fair value requires accepted methodologies and clear documentation.

Carta Portfolio Valuations supports this process end to end. You can run valuations in software using accepted methods aligned to the ASC 820 fair value framework and AICPA guidance, or engage our team for full-service support—including draft deliverables and auditor Q&A—when you need extra hands. Either way, you’ll have a repeatable, audit‑ready workflow for consistent financial reporting.

 → Learn more about Portfolio Valuations with Carta

How to build a defensible valuation process for audit and LP reporting

Connecting valuation theory to the real-world operational duties of a fund CFO is where a strong, repeatable process becomes invaluable, particularly as investors and regulators raise concerns about measurement uncertainties in financial reporting. Managing this process in spreadsheets creates unnecessary risk and operational drag, which often leads to confusion and costly inaction.

An integrated platform provides a centralized, auditable system for the entire valuation workflow. With Carta's Portfolio Valuations, you can manage everything from data collection to calculation and reporting in one place. This removes the operational burden and risk of manual processes, allowing you to focus on the strategic judgments that matter while maintaining a clean, defensible audit trail for financial audits.

Mastering ASC 820 disclosure requirements

The valuation itself is only half the battle; the disclosure requirements are how you prove the credibility of your assessment to your LPs and auditors.

Your financial statement footnotes must clearly explain your valuation process, as the standard requires specific disclosures for restricted equity securities, including any restrictions on the sale or use of the asset and the circumstances under which they could lapse. Key disclosures include:

• The fair value for assets and liabilities, categorized by the fair value hierarchy level

• For Level 3 measurements, a reconciliation of the beginning and ending balances for the reporting period

• A description of the valuation techniques and any significant unobservable inputs used

A modern LP portal with features like LP Portfolio Analytics provides investors with on-demand access to these financial statements and disclosures. This fosters transparency and reduces the number of ad-hoc requests your team has to field, saving you time and building confidence with your investors.

The role of calibration in maintaining consistency

Calibration is an essential concept for building an audit-defensible valuation, and even in a down market for deal volume, M&A data can provide a crucial market-based check; for example, while overall M&A market activity dropped in 2023, acquisition valuations increased year-over-year. Calibration is the process of checking to ensure that your valuation model's outputs are consistent with known, market-based evidence. This often means reconciling the current valuation to the transaction price of the company's most recent financing round, such as a seed funding round.

This step creates a logical and defensible starting point for future valuations. It demonstrates to auditors and LPs that your valuation is grounded in market realities, not just internal assumptions, which is a critical component of a trustworthy valuation process.

Documenting your methodology for a clean audit trail

In an audit, your documentation is your defense, and it must reflect the nuances of the standard. A strong valuation policy, supported by software like Carta's Portfolio Valuations, and contemporaneous memos that explain your judgments are not optional.

By creating a single source of truth with a complete, unassailable audit trail, you give auditors direct access to the information they need, when they need it, streamlining the entire audit process.

To learn how Carta can help you build a defensible, audit-ready valuation process, speak to an expert.

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Frequently asked questions about ASC 820

What is an ASC 820 report?

There is no standalone ASC 820 report. Instead, ASC 820 dictates how fair value is measured and disclosed within a fund's standard financial statements, such as the Schedule of Investments and in the report's footnotes.

What is ASC 820-10?

ASC 820-10 is the overall section of the fair value measurement standard that provides the definition of fair value, establishes a framework for measuring fair value under the Generally Accepted Accounting Principles (GAAP), and expands disclosures about fair value measurements.

How does ASC 820 address nonperformance risk for liabilities?

ASC 820 requires that the fair value of a liability includes nonperformance risk, which is the risk that an obligation will not be fulfilled. This must incorporate the entity's own credit risk from a market participant's perspective.

What financial instruments in our portfolio are subject to ASC 820 fair value measurement?

All financial instruments measured and reported at fair value on the balance sheet are subject to ASC 820 fair value measurement including equities, debt securities, derivatives, and certain alternative investments.

How often should we reassess the fair value of my portfolio companies?

You should reassess the fair value of your portcos at least annually, though some fund managers may have valuation committees that evaluate their investments on a quarterly basis.

How can we provide sufficient support for Level 3 fair value measurements?

Thoroughly document the valuation methodology used, detail the significant assumptions and key inputs, and explain the rationale behind them. Crucially, document all qualitative considerations that impact the fair value, such as market conditions, company-specific events, or the degree of information rights you have. Retain supporting evidence, such as valuation models, data sources, third-party valuation reports, and records of board or committee oversight or approval. Regularly review and update this documentation, especially when assumptions or methodologies change.

When do we need to use a valuation technique other than market price?

You need to use a valuation technique other than market price when quoted prices in active markets are not available, when the market is not active, or when the investment is illiquid or privately held.

How do current market conditions like liquidity and volatility impact our fair value estimates?

Current market conditions like low liquidity or high volatility can increase uncertainty in fair value estimates, requiring greater judgment and potentially leading to wider valuation ranges or adjustments to key inputs and assumptions.

What are the audit implications if we change valuation techniques or models?

If you change valuation techniques or models, auditors will require you to clearly document the reasons for the change, the impact on fair value estimates, and why the new method is appropriate under ASC 820. The audit team will closely evaluate the consistency of your approach, the justification for the change, and whether all disclosures about the change have been properly made in your financial statements. Changing techniques may also prompt additional questions about internal controls and governance over the valuation process.

What is the difference between ASC 820 and a 409A valuation?

A 409A valuation is performed for tax compliance to set the strike price for employee stock options, while ASC 820 is a financial reporting standard used by funds to determine the fair value of their investment assets for NAV calculation.