FASB's fair value hierarchy labels a startup mark Level 3

The record

The US accounting framework funds use to mark venture portfolio holdings traces to Statement No. 157, Fair Value Measurements, which the Financial Accounting Standards Board issued in 2006 and which now lives in the codification as ASC Topic 820. FASB's own summary of the Statement, archived since the live page was retired when the codification launched, states it was effective for fiscal years beginning after 15 November 2007, earlier application encouraged. It defines fair value as an exit price: the amount received to sell an asset in an orderly transaction between market participants at the measurement date, not the price paid to acquire it.

What the sources establish

FASB's summary states the Statement built a hierarchy distinguishing observable market participant assumptions from a reporting entity's own unobservable assumptions, naming both ends: a quoted price in an active market falls within Level 1, and a recurring measurement built on significant unobservable inputs falls within Level 3, the tier the disclosure rules focus on. A second source, the IPEV Guidelines, reproduces the codification's own paragraph 820-10-35-36B verbatim, including its statement that where there is a quoted price in an active market, that is, a Level 1 input, an entity must use that price without adjustment. Venture holdings, having no active quoted market, sit outside Level 1 entirely; under the hierarchy FASB's own summary describes, a fund's mark on an early-stage company is a Level 3 estimate built on unobservable inputs, not an observable market price.

Scope and revision

The Statement applies prospectively from the year an entity first applies it, with limited retrospective transition for a few named instruments, and did not itself create any new fair value requirement; it standardized how fair value is measured wherever another pronouncement already required or permitted it. The codification has since been amended, including 2022 changes to ASC 820 on contractual sale restrictions, which the IPEV Guidelines note became effective for that later period. Neither source supports treating a Level 3 mark as equivalent in evidentiary weight to a Level 1 quoted price; the levels describe input observability, not confidence in the result.

The decision in front of you

This is editorial: a reader who sees a portfolio company reported at fair value should ask which level of the hierarchy that figure occupies before comparing it to a public comparable's price. A Level 3 figure is a modelled estimate built on management and third-party assumptions, disclosed because the standard requires disclosure of inputs and their effect on earnings, not because the market produced the number independently.

• Does the disclosure identify the fair value level, and does Level 3 apply to the holding in question?
• What unobservable inputs and valuation technique produced the figure, as the standard's disclosure provisions require?
• Has the entity applied the post-2022 amendments on contractual sale restrictions, and would that change the mark?

Fair value covers both a quoted stock price and a private board's Level 3 estimate; the standard that defines the term also requires the level to be disclosed so the two are not read as interchangeable.