What is ASC 820? A Guide to Fair Value Measurements
ASC 820: A fund’s guide to fair value measurement
Author: The Carta Team
Read time: 14 minutes
Published date: November 26, 2025
Learn the core principles of ASC 820, including how to apply the fair value hierarchy, select appropriate methodologies, and build an audit-ready process.
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.
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.
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.
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.
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:
| Valuation approach | Best for | How it works |
|---|---|---|
| Market approach | Early-to-mid-stage companies with recent financing or comparable public companies. | Uses prices and other relevant information from market transactions, often generated during fundraising, involving identical or comparable companies. |
| Income approach | Later-stage, mature companies with a history of predictable cash flow. | Converts future amounts, like projected cash flows or earnings, to a single present value using a discount rate. |
| Asset approach | Very early, pre-revenue companies or situations like liquidations. | Determines value based on the cost to replace the service capacity of a company's assets. |
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.
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.
Asset approach
The asset approach determines the value of a portco based on the value of the company’s net assets minus its liabilities.
How to allocate enterprise value across complex capital structures
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.
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.
Waterfall method
The waterfall method accounts for the rights and liquidation preferences of the equity holders.
Common stock equivalent (CSE)
The CSE moves away from the consideration of rights and preferences, making certain assumptions about the equity holders.
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.
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
- Changes in Level 3 investments
- Valuation techniques
- Detailed quantitative disclosures about unobservable inputs used in the valuation.
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.
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 crucial, particularly as investors and regulators raise concerns about measurement uncertainties.
Mastering ASC 820 disclosure requirements
The valuation itself is only half the battle; the disclosure requirements prove the credibility of your assessment.
The role of calibration in maintaining consistency
Calibration is an essential concept for building an audit-defensible valuation.
Documenting your methodology for a clean audit trail
In an audit, your documentation is your defense, reflecting the nuances of the standard.
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 standard financial statements.
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.
How does ASC 820 address nonperformance risk for liabilities?
ASC 820 requires that the fair value of a liability includes nonperformance risk.
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.
How often should we reassess the fair value of my portfolio companies?
You should reassess the fair value of your portcos at least annually.
How can we provide sufficient support for Level 3 fair value measurements?
Thoroughly document the valuation methodology used, detailing significant assumptions and key inputs.
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.
How do current market conditions impact our fair value estimates?
Current market conditions can increase uncertainty in fair value estimates.
What are the audit implications if we change valuation techniques or models?
If you change valuation techniques or models, auditors will require you to document the reasons for the change.
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.
Author: The Carta Team
Carta's best-in-class software, services, and resources promote clarity and connection in the private capital ecosystem.