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:
26 November 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.
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.
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)
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.
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.
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. |
Additional Valuation Methods
- Option pricing model (OPM): A common allocation method for early-stage companies where the path to a future exit is uncertain.
- Probability-weighted expected return method (PWERM): Better suited for later-stage companies with more defined exit possibilities.
- 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, instead allocating value to equity holders assuming all preferred shares have converted to common shares.
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: Any recent material events that the valuation model might not fully capture.
- Financing and liquidity: Assessing the company's current cash runway and any anticipated financing needs.
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
- Level 3 measurement details
- Changes in valuation technique
- Nonrecurring fair value measurements
- Impact of market conditions
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.
How does ASC 820 address nonperformance risk for liabilities? ASC 820 requires that the fair value of a liability includes nonperformance risk, incorporating 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 quarterly.