ASC 820 valuations must be completed before audits because they define how investment fair values are measured, documented, and disclosed. For small and mid-sized fund managers, engaging a third-party valuation specialist is the most reliable way to ensure audit-ready compliance.
Key Takeaways
- Under ASC 946, investment companies, including private equity funds, hedge funds, and venture capital funds, are required to measure investments at fair value as per ASC 820.
- ASC 820 mandates disclosure of each asset’s fair value hierarchy level, the valuation technique applied, and the input data and assumptions used, with sensitivity analysis required for level 3 assets.
- Level 3 assets such as private equity stocks and complex derivatives require exceptional research skills and financial acumen to value accurately, making them the most challenging category for fund managers to handle in-house.
- Even seasoned investment professionals rely on external valuation experts for ASC 820 work, making third-party engagement a practical necessity for small and mid-sized asset managers.
What Is ASC 820 and Why Does It Apply To Fund Managers?
Under ASC 946 requires investment companies, including private equity funds, hedge funds, venture capital funds, and mutual funds, to measure the value of their investments at fair value, with changes recognized through the statement of operations.
The standard that defines how fair value must be established is ASC 820, which was formally codified in 2009 under the Financial Accounting Standards Board (FASB) codification project. In 2006 to standardize valuation methodologies and improve transparency in investment reporting across entities and periods.
What ASC 820 requires fund managers to disclose:
- The fair value hierarchy level assigned to each asset
- The valuation technique was applied.
- The underlying input data and assumptions
- For Level 3 assets – which include private equity investments, intangible assets, and complex derivatives, a sensitivity analysis showing how changes in unobservable inputs affect the reported value
Why Do Small and Mid-Sized Fund Managers Need ASC 820 Valuations Before Audits?
The purpose of ASC 820 is to ensure that investments are reported at their fair market value rather than historical cost. Investors rely on fair value reporting to understand what their holdings are worth today and to make informed allocation decisions.
When auditors examine a fund’s financial statements, they review not only the reported values of investments but also the methodologies, inputs, and assumptions behind those values. ASC 820 mandates disclosure of the fair value hierarchy level assigned to each asset, the valuation technique applied, and the underlying input data and assumptions.
For level 3 assets, which include private equity stocks, patents, and complex derivatives, a sensitivity analysis showing how changes in unobservable inputs affect the reported value is also required.
Completing a rigorous ASC 820 valuation before the audit cycle begins ensures that every disclosure requirement is addressed and the documentation is ready for auditor review.
What Makes ASC 820 Valuations Challenging to Perform In-House?
Measuring fair value in accordance with ASC 820 requires exhaustive knowledge of accounting principles and significant familiarity with valuation techniques. The expertise threshold is not uniform across all asset types.
| Level 1 | NYSE/Nasdaq-listed securities | Low - quoted market prices available |
| Level 2 | Corporate bonds, derivatives of actively traded assets | Moderate - observable inputs required |
| Level 3 | Private equity investments, complex derivatives, intangibles | High - unobservable inputs; requires judgment |
Valuing level 1 assets, such as securities traded on the New York Stock Exchange or Nasdaq, is relatively straightforward given the availability of quoted market prices. Valuing level 3 assets is an entirely different challenge.
Level 3 assets must be measured through unobservable inputs, requiring the valuator to construct reasonable market value estimates without the benefit of directly comparable market data. This demands exceptional research skills, financial acumen, and the ability to balance qualitative judgment with quantitative modeling.
In such cases, portfolio valuation is as much an art guided by informed judgment as it is a science driven by financial models.
The Bandwidth Problem for Smaller Funds
For small and mid-sized fund managers, allocating the time and expertise needed to conduct this process rigorously is rarely feasible. Fund management demands continuous attention to investment decisions, portfolio oversight, and investor reporting.
An ASC 820 valuation is not an administrative task that can be layered on top of these responsibilities. It requires the same caliber of financial expertise that informs investment decisions and has its own documentation requirements.
Why Does Relying on a Third-Party Provider Improve Credibility?
Beyond the operational challenge, there is a credibility dimension to ASC 820 valuations that carries particular weight in the audit context. Auditors and investors place greater confidence in valuations prepared by an independent third party than in those prepared by the fund manager itself.
A self-prepared valuation, regardless of how carefully it is constructed, is perceived as potentially biased. A valuation prepared by a specialist firm removes that perception and strengthens the defensibility of the reported figures.
What third party providers bring to the process:
Third-party providers bring structured, repeatable methodologies to the valuation exercise. They are experienced with ASC 820 disclosure requirements, ensuring that the documentation package presented to auditors is complete, consistent, and appropriately structured.
Their expertise with level 3 assets, where input assumptions carry the most weight and auditor scrutiny is highest, is particularly valuable for funds whose portfolios include illiquid or hard-to-value investments.
Eqvista specialize in ASC 820 valuations, combining quantitative rigor with deep industry expertise. We produce reports that are both accurate and structured to meet the disclosure standards that auditors expect.
Frequently Asked Questions
ASC 820 defines how fair value must be measured and disclosed across a wide range of assets and liabilities. ASC 825 provides entities with the option to recognize the fair value of certain financial instruments, such as written loan commitments and forward purchase contracts for loans that are not readily convertible to cash.
ASC 820 defines how the fair value of any investment must be derived for accounting and reporting purposes. Section 409A of the Internal Revenue Code defines how a company must be valued when issuing equity compensation to determine the income and tax liability of the employee or service provider. Both govern fair value, but they serve different regulatory purposes and apply in distinct contexts.
ASC 820 classifies assets into three levels based on the observability of inputs used in fair value assessments. Level 1 covers assets with quoted prices in active markets, such as listed securities. Level 2 covers assets measured through observable inputs, including corporate bonds and derivatives of actively traded assets. Level 3 assets must be measured through unobservable inputs, such as private equity stocks, patents, and complex derivatives.
Eqvista- Fair Value Reporting That Holds Up to Audit Scrutiny!
ASC 820 compliance is not a one-time exercise. It is a recurring obligation that shapes the credibility of every audit and every investor report. Approaching the valuation process proactively ensures that financial statements are accurate, transparent, and defensible.
Eqvista’s experienced valuation team delivers data-backed, audit-ready ASC 820 valuations designed to meet the disclosure standards expected by auditors and investors.
Contact us to learn how Eqvista can support your fund’s valuation and compliance needs!
