ASC 820 Explained: How Private Assets Get Valued

TL;DR: ASC 820 is the U.S. accounting standard for measuring fair value. It sorts every valued asset into three levels by how observable the inputs are. Level 1 uses quoted prices. Level 3 uses inputs that are hard to observe, which is where private company holdings usually land, so the reported value is an estimate.

What does ASC 820 stand for?

ASC 820 is shorthand for Accounting Standards Codification Topic 820, the fair value measurement rules. It is also known as ASC Topic 820 and is related to the international standard IFRS 13. (source: en.wikipedia.org)

The codification is where U.S. GAAP now lives, so you will see "ASC 820" in fund financial statements, audit notes and SEC filings. It rarely gets a full page of explanation there. Usually it shows up as a line in a footnote, which is exactly why most investors never read it.

How does ASC 820 define fair value?

Fair value is an exit price. A company note in an SEC filing describes it 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.

That definition asks what the asset would fetch from a buyer today. It does not ask what the manager paid or what the manager hopes to get. For a listed stock, the answer is on a screen.

What are the three fair-value levels?

The standard ranks the inputs behind a valuation by how observable they are. The same SEC filing note says the hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The table shows how the three levels differ and what each one means when you read a statement.

Level	Inputs	Typical holding	What it means for you
Level 1	Quoted prices in active markets for identical assets	Exchange-traded derivatives, marketable securities and listed equities	Close to a real price. You could check it yourself.
Level 2	Inputs other than Level 1 quotes that can be observed directly or indirectly	Instruments valued using models or other valuation methods	A model, but fed by market data you can trace.
Level 3	Significant inputs that are generally less observable from objective sources	Privately held companies and other assets with no active market	A judgment call. The value depends on assumptions someone chose.

The Level 1 and Level 2 descriptions follow the SEC filing note. The Level 3 row applies the same definition to private holdings. Read down the last column. Your ability to check the number shrinks at every step, and by Level 3 you are mostly checking the manager's reasoning rather than anything the market has said.

Why is a Level 3 mark an estimate and not a price?

A Level 3 value is built from assumptions, so two careful managers can reach different numbers for the same company.

In a private fund, those assumptions are usually a discount rate, a comparable-company multiple, or the price of the last funding round adjusted for what has happened since. Nobody trades the stake on the reporting date, so the number is never tested against a buyer.

Small changes matter. Nudge the discount rate or swap one comparable company for another, and the value of a holding can move a long way without a single customer, contract or dollar of revenue changing. Two funds holding similar companies can report very different marks for reasons that live entirely in a spreadsheet.

This matters because the fund's net asset value, and the performance figures built on it, rest on those marks. Our earlier piece on how PE firms value your portfolio walks through the mark-to-model problem in detail, and our write-up of the SEC staff's fair-value reminder covers what regulators told managers to disclose.

Is ASC 820 the same as FAS 157?

In substance, yes. ASC 820 superseded the earlier standard, Statement of Financial Accounting Standards 157, which Wikipedia says defined fair value, established a framework for measuring it and expanded disclosures.

If you read a decade-old fund report, you may see "FAS 157" where a current one says "ASC 820". The three-level idea is the same, and so is the question it raises for you: how much of this number did someone have to estimate?

What should an LP ask about a Level 3 valuation?

Ask to see the inputs, not just the result. A reported NAV tells you the answer. The valuation policy tells you how the manager got there.

Start with who sets the marks and who reviews them. Ask what method the manager uses for each major holding, and when each mark was last updated. A stake valued from a funding round two years ago is a different thing from one reset last quarter. Then ask which holdings carry the most weight in the total, because one large position can drive an entire estimate.

It also helps to ask how the manager handled a holding that later sold. If past exits landed far from the last reported marks, in either direction, you have learned how much to trust the next one. A manager who can pull that history together quickly usually keeps good records. One who cannot is telling you something too.

If you want a second lens on the same habit, our piece on why dry powder is not dry powder if your due diligence still sucks applies the same skepticism to the fund-raising side.

Common mistakes

The most common mistake is treating a quarterly NAV like a stock quote. A stock quote is what someone just paid. A Level 3 NAV is what a manager believes the holding is worth.

Another mistake is assuming that "audited" means "verified by the market." Nobody trades the stake on the reporting date, so a clean audit and a soft mark can sit side by side.

A third is comparing two funds' returns without asking whether their marks use the same assumptions. A fund that marks conservatively can look worse than a peer that marks aggressively, even if the holdings are similar. Ask before you rank.

The last one is ignoring the footnote. It is short. It shows how much of the portfolio sits at each level, and that one line tells you how much of your statement is observable and how much is opinion.

FAQ

What does ASC 820 stand for?

It stands for Accounting Standards Codification Topic 820, the fair value measurement guidance. It tells companies and funds how to define fair value, rank their valuation inputs, and disclose how they measured it.

Is ASC 820 US GAAP?

Yes. Wikipedia describes it as an American accounting standard issued by the Financial Accounting Standards Board. The international counterpart is IFRS 13, which covers the same subject for companies outside U.S. GAAP.

What is the difference between ASC 820 and ASC 825?

ASC 820 covers how to measure fair value and rank the inputs. None of our cited sources describes ASC 825, so we won't characterize it here. Check your fund's notes and your accountant for how it applies to a specific holding.

Is FAS 157 the same as ASC 820?

ASC 820 superseded FAS 157, per Wikipedia. The fair-value definition and three-level hierarchy carried forward into the codification. Older documents cite FAS 157, and newer ones cite ASC 820 for the same framework.

What to do today

Open the most recent report from any private fund you hold and find the fair value note. Count how much of the portfolio sits in Level 3, then email the manager and ask for the valuation policy and the date each major holding was last marked.

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