ASC 820 for Private Equity Funds: A CFO's Operational Guide to Fair Value Measurement
Author: Redwood Valuation Content Team
Published: July 21, 2026
ASC 820 is the FASB measurement standard for fair value. A private equity fund also works under two other frameworks that serve different purposes: ASC 946, which governs how investment companies account for, present, and disclose their investments and related activity, and the AICPA VC/PE Practice Aid, which provides the most widely used non-binding implementation guidance. A fund needs to be aware of all three. ASC 820 measurements are required at each reporting date, whether for a quarterly report or year-end audit. Valuations that are reasonable, built on industry best practices, supported by methodologies auditors recognize, and aligned with these frameworks make those reporting and audit cycles easier for funds and auditors alike. Valuations that don't fit that mold tend to create headaches and frustration for everyone involved.
This guide covers what ASC 820 actually requires of a PE fund, how the three frameworks divide the work, and the audit pain points that produce most of the disputed measurements we see across reporting periods.
What ASC 820 Requires of a Private Equity Fund
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. For a private equity fund, that definition gets applied to a portfolio of illiquid positions where no observable price exists, which is why ASC 820's three-level fair value hierarchy matters operationally: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs).
Most PE fund holdings sit in Level 3. The fund's auditor will test the inputs, the methodology, and the calibration of that methodology to a recent transaction price. ASC 820 sets the measurement objective; the AICPA VC/PE Practice Aid provides the most widely used implementation guidance for these holdings.
Three Frameworks, Different Purposes
ASC 820 is binding. It is the FASB standard that defines fair value and the measurement framework. ASC 946 is also binding for entities that meet the investment company definition; it specifies how investment companies account for, present, and disclose their investments. The AICPA VC/PE Practice Aid is non-binding professional guidance. It recommends methods and disclosures, and audit firms generally treat it as best practice, but the Practice Aid does not establish rules.
In our practice, the cleanest way to keep the frameworks straight is to remember what each does:
ASC 820 = how fair value is defined and measured
ASC 946 = how investment companies account for, present, and disclose their investments
AICPA VC/PE Practice Aid = how the industry typically implements 820 and 946 for VC/PE holdings
When auditors push back on a valuation, it's typically because the analysis doesn't adhere to something in one of the three frameworks, not because the valuation belongs to one framework rather than another.
Why Portfolio Company Valuations Still Need Fund-Level Judgment
Portfolio company valuation materials can be useful inputs, but they do not replace the fund's ASC 820 measurement. A portfolio company's own valuation (including a 409A report prepared for that company's option-pricing compliance) is built for a different purpose and a different unit of account, so it generally cannot serve as the fund's mark on its own.
The 409A report may still be useful. It can provide background on the company and portfolio company management's insight regarding items like risks and opportunities. But the fund's auditor will expect an ASC 820 analysis tied to the fund's actual instrument and reporting date.
The fund still needs to evaluate its specific instrument, its rights and preferences, the transaction terms, calibration, reporting-date developments, and market-participant assumptions. The key audit question is not whether another valuation exists, but whether the fund's mark is supportable for its specific holding at the measurement date.
The Fair Value Hierarchy in Practice
ASC 820's three-level hierarchy ranks the observability of valuation inputs, with Level 3 (unobservable) sitting at the bottom. For a typical PE fund, most positions classify as Level 3, which means the disclosure burden and audit scrutiny are highest where the inputs are least observable.
A Level 3 measurement on a portfolio company holding usually involves determining the value of the company and then allocating that value down to the per-share level used to calculate the fund's holdings. The methodology employed to determine the company's equity value depends on the circumstances of each company, and may draw on an income approach (a DCF on fund-adjusted forecasts) or a market approach (comparable company multiples or precedent transactions), with an allocation methodology converting total equity value to the fund's specific instrument.
Level 3 measurements also carry the heaviest disclosure burden. ASC 820 requires Level 3 disclosures including the valuation techniques and inputs used, quantitative information about the significant unobservable inputs, a reconciliation of changes during the period, and the entity's policy for determining when transfers between levels are recognized. For PE funds where most positions sit at Level 3, the disclosure note is part of the audit work and is often reviewed closely by auditors, not an afterthought.
Allocation: Matching the Method to Control Over Exit
The allocation method follows from how much control the fund has over exit timing. The minority/majority label is a useful proxy, but control is the driver. The AICPA VC/PE Practice Aid (Chapter 8) covers the allocation methods and the conditions under which each fits.
Option Pricing Method (OPM)is the standard allocation approach when the fund cannot control exit timing, which is the typical minority position. It treats each class of equity as a call option on the company's equity value at increasing strike prices defined by the liquidation preferences and conversion thresholds. OPM suits these positions because it captures the optionality embedded in preferred stock without requiring scenario weights that a holder without exit control cannot reliably forecast.
Current Value Method (CVM) allocates value as if the company were sold or dissolved at the measurement date, running the proceeds through the liquidation waterfall. Because the CVM looks at the present rather than the future, the Practice Aid (¶8.58) treats it as most appropriate in two circumstances: when a liquidity event such as an acquisition or dissolution is imminent and the company's prospects as a going concern are largely irrelevant; and when the fund's position is senior to the other equity classes and the fund controls the timing of exit, so it could realize the allocated value on the measurement date. Buyout funds and control growth equity positions often fit the second circumstance.
When the outcome is forward-looking rather than imminent, the Probability-Weighted Expected Return Method (PWERM) is the scenario-based approach: it models specific exit scenarios (sale, IPO, recap) with documented assumptions and weights the discrete exit paths.
The binding requirement under ASC 820 is that the methodology produce a market-participant fair value, not that any specific allocation method be used. The Practice Aid is where the method-selection guidance lives.
Calibration
Calibration is the process of using observed transactions in the portfolio company's own instruments (especially the transaction in which the fund entered its position) to ensure the valuation techniques used on subsequent measurement dates begin with assumptions consistent with that original transaction, along with any more recent observed transactions. It can apply to implied transaction multiples, compared against the multiples in a guideline-public-company method, or to an implied discount rate, compared against the discount rate in a DCF.
A backsolve is one form of calibration: it solves for the equity value that reproduces a recent round price, then carries those assumptions forward. For a PE fund holding preferred stock issued at a primary round, calibrating to the round price is standard practice, and auditors expect to see it.
The Sandwich Problem: A Known Limitation of OPM
Separate from calibration, the AICPA VC/PE Practice Aid (¶8.43–8.44) describes a structural weakness in the OPM that funds with multiple preferred classes need to watch.
Several OPM assumptions do not hold when senior securities do not control the timing of exit. When the model includes senior and junior preferred classes, the junior preferred's liquidation preference is "sandwiched" between the senior preferred and the common: on the downside, only the senior preferred is protected; on the upside, the junior preferred receives only its specified payoff, while common and converted or participating preferred capture any additional growth.
In practice, preferred investors influence operations and the timing of exit rather than passively letting value evolve to a predetermined exit date as the OPM assumes. Because enterprise value and exit outcomes are shaped by investor behavior and negotiations, strict waterfall economics may not fully capture how value is shared in practice: senior holders may maximize their return by sharing value with junior holders rather than rigidly following the waterfall. The OPM does not model any of these dynamics.
One approach to address this "sandwich problem" mentioned in the Practice Aid is to model the liquidation preferences as pari passu in estimating the equity value, then reallocate considering the contractual seniorities, applying a calibration discount to the model value for the senior preferred to reflect that its liquidation preference would not have as much value as the valuation model would otherwise indicate.
Discount for Lack of Marketability (DLOM)
DLOM is the adjustment that reduces fair value to reflect the holder's inability to sell into a liquid market at the measurement date. DLOM is commonly considered in 409A valuations of privately held common stock because the subject interest generally lacks access to a liquid public market and may be subject to transfer limitations.
For fund-held preferred under ASC 820, whether a DLOM applies is genuinely debated, and the guidance is principles-based with no bright line. A holder who controls the exit and shares the same rights as the marginal market participant may have little marketability gap, and so little or no discount. But a minority preferred holder (with fewer rights, less information, and no ability to influence the exit) is in a meaningfully worse position than the control investors, and that gap can justify a discount. Sometimes the effect is captured through the allocation and rights modeling rather than a freestanding percentage haircut.
In our practice, we assess the DLOM based on the circumstances, considering secondary market evidence, the position's transferability rights, and any contractual restrictions that genuinely limit a market participant's ability to transact. Auditors increasingly push on DLOM assumptions for fund-held preferred, and a documented rationale is what carries the day.
OPM Volatility
OPM relies on a volatility input that should be forward-looking in principle: the expected volatility of the company's equity value over the time to a liquidity event. In practice, forward-looking volatility for a private company is unobservable. The standard proxy is historical equity volatility for a basket of comparable public companies, sometimes adjusted for size or leverage.
Auditors test the comparables basket, the historical lookback period (often the time to an expected liquidity event), and any size or industry adjustments. The most common audit finding is a mismatch between the volatility input and the company's stage: a comparables basket of mature public companies typically understates volatility for an early-stage portfolio company.
In our practice, volatility selection benefits from documenting the comparables search, the screening criteria, and the rationale for the lookback period. The auditor's question is rarely "is this number right" but "can you defend how you got here."
ASU 2022-03 and the NAV Practical Expedient
Two recent measurement updates affect PE fund fair value work: one tightens what funds can discount, and one provides a practical expedient for measuring certain fund investments.
ASU 2022-03 (narrows what funds can discount) clarified that a contractual sale restriction on an equity security is not considered in measuring that security's fair value. The FASB treats such a restriction as a characteristic of the holder, not of the security itself. This narrowed the ability to take a discount for transfer restrictions that exist because of who holds the security (a fund's lockup, for example) rather than restrictions embedded in the security's terms.
This does not mean all marketability or liquidity considerations disappear. The key question is whether the limitation is a characteristic of the security that market participants would consider, or a holder-specific restriction that should not be reflected in fair value.
NAV practical expedient (affects a reporting entity measuring its fund interest) under ASC 820-10-35-59 allows a fund-of-funds investor to measure its investment in another fund at the underlying fund's net asset value per share, provided the investee calculates NAV per share consistent with ASC 946. The fund itself measures its portfolio company holdings under the full ASC 820 framework; the reporting entity measuring its fund interest may be able to use NAV as a practical expedient when the required conditions are met.
Three GP Audit Pain Points We See Most Often
In our practice working with PE fund CFOs through periodic reporting and year-end audit, three operational issues account for most of the disputed measurements.
1. Gut-feel valuations. Marking a position to a recent round price is often fine, and many auditors will accept it when the round is recent and arm's-length. The problem is the undocumented qualitative conclusion: "we held it flat because nothing material happened." Even when fair value reasonably approximates cost or the prior-period mark, auditors expect a documented analysis supporting that conclusion, and they are increasingly unwilling to accept gut-feel without it.
2. Post-money value. The post-money value implies all shares are equal. This may be accepted by auditors if the company is approaching an IPO, the investors in the latest round anticipated a near-term IPO when they invested, and the value can be supported by another method employing reasonable inputs. Otherwise, auditors may push back on the logic that there is no value associated with incremental share-class rights.
3. Year-end timing. ASC 820 measurements are required at each reporting date, but the operational work tends to compress into Q4 and Q1. Funds that start the year-end measurement process in January or later frequently find themselves negotiating methodology with auditors while the report deadline is moving toward them. Starting earlier, with Q3 financials and methodologies that auditors prefer, is the cleanest fix.
Across all three, third-party valuations support audit defense for Level 3 PE holdings by providing independent methodology and documentation. Many PE funds engage them for that reason, though sophisticated in-house teams can also produce audit-ready work product when the documentation discipline is in place.
Working with Redwood
The cleanest ASC 820 audit cycles share three traits: methodology selected to match the position and its control over exit; calibration that anchors to the fund's actual entry transaction; and documentation that lets the auditor reconstruct your judgment.
Redwood Valuation works with PE fund CFOs and valuation leads on ASC 820 measurements that need to clear audit. If your fund is preparing fair value measurements for a quarterly report or year-end audit and would like a second opinion on methodology or a defensible documentation framework, contact our team to discuss your portfolio.
Frequently Asked Questions
Can we rely on portfolio company valuation materials for our ASC 820 mark?
They can be useful inputs, but they generally do not replace the fund's own ASC 820 analysis. The fund needs to measure the fair value of its specific position, including the instrument's rights, preferences, seniority, and the relevant market-participant assumptions at the reporting date.
Is the AICPA VC/PE Practice Aid binding?
No. The Practice Aid is non-binding professional guidance. ASC 820 and ASC 946 are the binding standards. Most auditors treat the Practice Aid as best practice, but a methodology that departs from it can still satisfy ASC 820 if the departure is documented and defensible.
When should we use OPM versus a waterfall?
OPM is the standard allocation when the fund cannot control exit timing (typically a minority position); a waterfall or CVM is typical when the fund controls exit timing. The choice follows from the fund's degree of control over the exit.
How early should we start the ASC 820 measurement process for year-end?
In our practice, funds that begin documentation work in late Q3 for a calendar year-end have substantially smoother audit cycles than funds starting after year-end. Tying up loose ends is easier to resolve before the reporting deadline is imminent.