Fair Value Made Simple: ASC 820 & IFRS 13 Best Practices for PE & VC Fund Managers

Fair value reporting is one of the most consequential responsibilities for private equity and venture capital fund managers. It determines the numbers reported to limited partners, drives carried interest calculations, influences fundraising for subsequent funds, and attracts regulatory scrutiny when done poorly.

Yet for many fund managers -- particularly emerging managers running their first or second fund -- fair value remains an area of uncertainty. The standards are technical. The inputs are subjective. The stakes are high.

This guide provides a practical framework for getting fair value right under both ASC 820 (U.S. GAAP) and IFRS 13 (international standards), with a focus on the real-world decisions that PE and VC fund managers face every quarter.

What Fair Value Actually Means

Fair value, as defined by both ASC 820 and IFRS 13, is 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.

Three elements of this definition are critical:

Exit price. Fair value is based on what you would receive if you sold the asset today -- not what you paid for it, not what you hope it will be worth, and not what a specific buyer might pay under unique circumstances.

Orderly transaction. The hypothetical sale assumes normal market conditions -- not a forced liquidation, fire sale, or distressed transaction. This means fair value should not reflect the discount you would accept if you needed to sell immediately.

Market participants. The price should reflect assumptions that knowledgeable, willing, and able market participants would use. Your own strategic value or synergy expectations are generally not relevant.

Why It Matters for Fund Managers

For PE and VC fund managers, fair value reporting directly impacts:

LP reporting. Quarterly and annual reports to limited partners include net asset value (NAV) calculations that rely on fair value marks for portfolio companies.
Carried interest. The general partner's performance fee is typically calculated based on fair value gains. Over-marking creates phantom carry; under-marking delays legitimate compensation.
Fundraising. Track record metrics (IRR, MOIC, DPI) for current and prior funds are derived from fair value marks. Prospective LPs scrutinize these numbers closely.
Regulatory compliance. The SEC, through its examination program, has made fair value practices a priority area. Deficiencies can result in enforcement actions, particularly where valuations appear to favor the GP over LPs.

The Three Valuation Approaches

Both ASC 820 and IFRS 13 recognize three valuation approaches. Fund managers typically use one or more in combination, depending on the nature of the investment and the availability of data.

Market Approach

The market approach estimates fair value by reference to observable market data -- comparable company multiples, precedent transactions, or recent financing rounds.

Common techniques:

Guideline public company method. Apply valuation multiples (EV/Revenue, EV/EBITDA, P/E) from publicly traded comparable companies to the portfolio company's metrics, adjusted for differences in size, growth, profitability, and liquidity.
Guideline transaction method. Use multiples from recent M&A transactions involving comparable private companies.
Calibration to recent rounds. For venture-stage investments, the most recent financing round provides a starting point that is then adjusted for changes in the company's performance and market conditions since the round closed.

When to use it: The market approach is most reliable when good comparables exist and market data is current. It is the most commonly used approach for VC portfolio companies.

Income Approach (DCF)

The income approach estimates fair value by discounting expected future cash flows to their present value using a rate that reflects the risk associated with those cash flows.

Common techniques:

Discounted cash flow (DCF). Project free cash flows over a discrete forecast period, estimate a terminal value, and discount both at an appropriate rate (typically WACC or a venture-appropriate discount rate).
Option pricing models. For complex capital structures with multiple equity classes, option pricing models (such as Black-Scholes or Monte Carlo simulations) allocate enterprise value across equity classes.

When to use it: The income approach is more common for PE investments in established businesses with predictable cash flows. For early-stage VC investments, the high uncertainty of cash flow projections makes DCF less reliable as a primary method.

Asset-Based Approach

The asset approach estimates fair value based on the net value of the company's assets minus its liabilities.

When to use it: This approach is most relevant for holding companies, asset-heavy businesses, or distressed situations where liquidation value is the most meaningful measure. It is rarely the primary approach for growth-stage technology investments.

The Fair Value Hierarchy

Both ASC 820 and IFRS 13 establish a three-level hierarchy that classifies valuation inputs based on their observability. This hierarchy drives both the rigor required in the valuation process and the extent of disclosure in financial statements.

Level 1: Quoted Prices

Quoted prices in active markets for identical assets or liabilities. For fund managers, Level 1 inputs are rare -- they apply primarily to publicly traded securities in the portfolio.

Level 2: Observable Inputs

Inputs other than quoted prices that are observable, either directly or indirectly. This includes quoted prices for similar assets, interest rates, yield curves, and other market-corroborated data. For PE and VC managers, Level 2 inputs might include comparable company multiples or recent transaction data for similar companies.

Level 3: Unobservable Inputs

Inputs that are not observable and reflect the fund manager's own assumptions about what market participants would use. The vast majority of PE and VC portfolio company valuations fall into Level 3, which requires the most rigorous documentation and disclosure.

Key implication: Because most private fund valuations are Level 3, fund managers bear a heightened responsibility to document their assumptions, methodologies, and the rationale for changes in value from period to period.

Key Valuation Adjustments

Several adjustments are commonly applied when valuing private company investments:

Discount for Lack of Marketability (DLOM). Private company interests are less liquid than publicly traded securities. A marketability discount, typically ranging from 10% to 30%, reflects this reduced liquidity. The appropriate discount depends on factors including expected holding period, the company's stage, and the likelihood of a liquidity event.

Control Premium or Minority Discount. Controlling interests in a company are typically worth more than minority interests because of the ability to influence operations, strategy, and distributions. When valuing a minority position, a discount from enterprise value may be appropriate; when valuing a controlling position, a premium may apply.

Illiquidity Adjustments. Beyond the standard DLOM, additional illiquidity adjustments may apply in situations where exit opportunities are particularly constrained -- for example, in highly specialized industries or during periods of market dislocation.

Disclosure Requirements

Both ASC 820 and IFRS 13 require extensive disclosures for Level 3 fair value measurements, including:

Valuation techniques used and changes from prior periods
Quantitative information about significant unobservable inputs
A reconciliation of beginning and ending balances for Level 3 measurements
Transfers between levels of the hierarchy
Sensitivity analysis describing how changes in unobservable inputs would affect fair value

These disclosures serve both regulatory and LP communication purposes. Clear, comprehensive disclosures build trust and reduce the likelihood of disputes or regulatory inquiries.

Governance Best Practices

Strong valuation governance is the foundation of defensible fair value reporting. Fund managers should implement the following practices:

1. Establish a formal valuation policy. Document the methodologies, processes, and controls that govern fair value measurements. The policy should cover frequency of valuations, approval workflows, use of third-party valuation firms, and escalation procedures for significant or complex positions.

2. Maintain independence. The individuals responsible for valuation should be independent from the investment team. For smaller funds where complete separation is impractical, implement a review process that includes independent oversight -- either through a valuation committee or an external advisor.

3. Engage third-party valuation firms. For significant positions and at least annually, obtain independent valuations from qualified third-party firms. This provides a check on internal estimates and strengthens the defensibility of marks.

4. Document everything. Every valuation should be supported by documentation that explains the methodology selected, the inputs used, the adjustments applied, and the rationale for the conclusion. This documentation should be sufficient for an auditor or regulator to understand and evaluate the work.

5. Conduct quarterly reviews. Fair value is not a once-a-year exercise. Portfolio company valuations should be reviewed quarterly, with adjustments reflecting changes in company performance, market conditions, and comparable data.

A Quarterly Review Cadence

A disciplined quarterly valuation process typically follows this sequence:

Week 1-2: Collect updated financial data from portfolio companies (revenue, EBITDA, cash position, key metrics). Gather updated comparable company data and recent transaction information.

Week 2-3: Perform preliminary valuations using established methodologies. Identify any positions that require additional analysis or methodology changes.

Week 3-4: Conduct valuation committee review. Challenge assumptions, review sensitivity analyses, and approve final marks.

Week 4+: Finalize valuations, update LP reports, and prepare disclosure documentation.

Building a Defensible Practice

Fair value reporting is not a compliance exercise to be minimized. It is a core competency that directly impacts LP trust, regulatory standing, and fundraising success.

Fund managers who invest in robust valuation infrastructure -- clear policies, independent oversight, documented processes, and regular reviews -- build a competitive advantage. LPs increasingly evaluate operational quality alongside investment returns, and valuation governance is a key component of that assessment.

At Rubric Financial, we support PE and VC fund managers with the financial infrastructure needed to produce defensible, transparent fair value reporting. From establishing valuation policies to implementing quarterly review processes, our team brings the accounting expertise and technology platform to get it right.