What Is ASC 820? A Guide to Fair Value Measurement for Startup CFOs

Venture capital and private equity firms are under pressure to ensure their portfolio valuations are consistent, audit-ready, and defensible, especially as investor scrutiny and regulatory standards evolve. While startup CFOs and finance leaders aren’t typically responsible for conducting these valuations, they benefit from understanding how they work—especially when preparing for investor conversations or audits.

That’s where ASC 820 comes in. This accounting standard defines how to measure fair value, providing a common, market-based framework for evaluating investments. For VC firms managing dozens (or hundreds) of portfolio companies, having a reliable, repeatable approach to fair value measurement isn’t just a reporting requirement; it’s critical for maintaining investor trust and navigating audits with confidence.

For CFOs and finance teams, understanding ASC 820 is essential for navigating financial reporting, investor conversations, and audit prep.

In this guide, we’ll explain ASC 820's fair value hierarchy and why CFOs should have a good understanding of the concept.

What is ASC 820?

ASC 820 refers to the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification Topic 820, which defines how venture capital and private equity funds determine and disclose the fair value of their portfolio investments on financial statements. The goal is consistency: making sure that valuations are comparable across funds and time periods.

For venture capital firms, valuing illiquid assets (like equity in private startups) poses a unique challenge, especially when there’s no active market to benchmark against.

Enter ASC 820’s fair value hierarchy. It groups valuation inputs into three levels, based on how observable the data is. Level 1 relies on quoted market prices. Level 2 is less liquid but still rooted in market data. Level 3, where most startup investments land, uses unobservable inputs—estimates based on internal models and judgment. The less observable the input, the more rigorous the financial documentation needs to be.

Who benefits from an ASC 820 valuation?

ASC 820 valuations aren’t just a regulatory checkbox—they have real strategic weight. These fair value assessments inform a range of strategic and operational needs:

• Finance teams apply ASC 820’s fair value measurement principles when reporting stock-based compensation under ASC 718.
• Boards and auditors want clarity and consistency in how fair value is determined.
• Founders and CFOs use transparent application of fair value measurement principles in financial statements to build trust with investors and prepare for audits.

Especially for growth-stage startups preparing for new funding or undergoing a major audit, ASC 820 provides a framework that helps reduce risk and increase confidence across stakeholders.

Understanding ASC 820 fair value

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 on the measurement date. This is commonly referred to as the exit price. 

ASC 820 sets the standard for how investment firms, auditors, and other stakeholders assess whether reported valuations are transparent, consistent, and reliable.

That distinction matters. Exit price anchors stock option valuations, affects how financial liabilities get booked, and supports clean audit trails. ASC 820 doesn’t allow estimates from an internal view. VC firms have to consider market conditions and what someone else would pay, which keeps the numbers defensible.

What is the fair value hierarchy?

ASC 820 defines a hierarchy for measuring fair value, especially when valuing illiquid or hard-to-price assets. While startup CFOs don’t conduct these valuations themselves, understanding the framework helps them make sense of how investors report portfolio value and what auditors look for.

Here’s how the ASC 820 fair value hierarchy works:

• Level 1 (most liquid): Quoted prices in active markets for identical assets or liabilities (e.g., public company stock). These are the most objective and reliable inputs.
• Level 2 (less liquid): Inputs other than quoted prices—such as interest rate swaps or pricing for similar assets in inactive markets. These require some adjustments but are still grounded in market data.
• Level 3 (least liquid): Unobservable inputs based on management’s assumptions—often used for valuing private equity, early-stage equity, or financial instruments with high impairment risk (like investments or loans). Because of the subjectivity involved, Level 3 inputs require rigorous documentation and are scrutinized more heavily in audits.

Even if you’re not running ASC 820 valuations, you’ll likely encounter them in investor reports, during audit prep, or in conversations around portfolio value. Knowing how the input levels work can help you interpret disclosures and anticipate the kinds of questions auditors or board members may raise.

It’s also important not to confuse ASC 820 with 409A valuations. While both assess fair value, they’re used for entirely different purposes. 409A valuations help startups set the strike price for employee equity grants in line with IRS rules. ASC 820, by contrast, governs how VCs and funds mark their investments for financial reporting. They’re not interchangeable, and each serves a distinct regulatory and strategic role.

Still, it’s essential for CFOs to understand the difference. You’re often the one fielding questions from investors, supporting audits, and explaining why valuation methods differ. A clear grasp of both ASC 820 and 409A valuation frameworks helps avoid confusion, maintain credibility, and ensure your company is speaking the same language as your investors.

Finally, ASC 820 aligns conceptually with International Financial Reporting Standards (IFRS) 13, the international fair value standard, though compliance across both frameworks should be guided by an experienced accounting team.

Fair value disclosure requirements

ASC 820 sets detailed disclosure standards for how assets and liabilities measured at fair value appear in financial statements. For startup CFOs, understanding the requirements can make investor reports, board materials, and audit reviews far easier to navigate.

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Here’s what ASC 820 disclosures typically cover:

• Valuation techniques and inputs: Firms must share how they arrived at fair value, whether they used a market, income, or cost approach, and what assumptions drove those calculations.
• Fair value hierarchy level: Each valuation must be classified as Level 1, 2, or 3, based on how observable and reliable the inputs are.
• Any changes in valuation methods: If inputs or techniques change from one reporting period to the next, those changes must be explained.
• Effects on income, equity, or loss: Disclosures must show how fair value measurements affect financials.
• Transfers between hierarchy levels: If an asset moves between levels, say, from Level 2 to Level 3 due to shifting market data, that movement must be disclosed and justified.

These disclosures are designed to bring transparency and consistency to valuations, helping auditors, investors, and regulators understand both the reliability of reported numbers and the professional judgment behind them. Note that while nonpublic entities may qualify for reduced disclosure requirements under ASC 820, these core elements are still broadly applicable, especially in the context of investor communications and audit prep.

Why it matters for CFOs: While startup CFOs aren’t typically responsible for preparing ASC 820 disclosures or valuations, it’s important to understand how these standards shape portfolio reporting. The better you understand the underlying logic and documentation, the better equipped you are to engage with investor updates, respond to board questions, and prepare for audits.

How to measure fair value using ASC 820

We’ve defined a lot of terms and provided a lot of context around ASC 820, but the question remains: How is ASC 820 used to measure fair value? Generally speaking, there are two steps:

Step 1: Determine the enterprise value

ASC 820 valuations use three valuation approaches for determining the enterprise value of the company:

• Income approach (a.k.a. capitalized cash flow analysis): Estimates the present value of future cash flows, often used for revenue-generating businesses.
• Market approach: Looks at recent transactions involving identical or comparable assets like comparable company analyses or M&A activity. For example, you might look at publicly traded companies of comparable size, revenue, and target market/audience (this sub-approach is called the guidelines public company method and involves a number of assumptions).
• Asset approach: Measures what it would cost to replace an asset today, adjusted for depreciation or obsolescence. This method is often applied to early-stage companies with limited revenue history.

Trained valuation professionals—either in-house experts at VC firms or third-party specialists hired by VC firms—apply these approaches to determine fair value, often working in coordination with a company's auditors to meet ASC 820 requirements. And while ASC 820 outlines how to measure fair value, it doesn’t decide when it’s required. That’s determined by other accounting standards.

What ASC 820 does do is set the ground rules for fair value: Valuations should reflect the price an informed, independent buyer would pay in today’s market—not internal projections or assumptions.

Step 2: Allocate value across share classes

Once enterprise value is established by valuation specialists or auditors using ASC 820’s framework, the next step for funds or reporting entities is to allocate that value across a company’s various share classes. This allocation is typically required for financial reporting or investor portfolio valuation, not for internal company use or for 409A purposes.

Here are a few common allocation methods:

• Option Pricing Model (OPM): Models each share class as a call option on the company’s equity. While often used in 409A valuations, OPM can also appear in ASC 820 contexts when market data is limited. It may use a model such as the Black-Scholes model to account for factors such as market volatility and time to liquidity.
• PWERM (Probability-Weighted Expected Return Method): Evaluates specific exit scenarios and weights them by likelihood, then allocates the value to each share class based on the rights and terms of different shareholder agreements.
• Waterfall analysis: Allocates value based on shareholder preferences—useful near IPO or M&A.
• Common Stock Equivalent: Assumes all shares are common, then allocates a value for all shares. This approach is rarely sufficient for audit purposes because it overlooks key distinctions between share classes.

Track and manage your full equity picture with Pulley

ASC 820 creates a definition of fair value, bringing consistency, transparency, and auditability to how companies report the value of assets and equity. 

For finance leaders and CFOs, a clear understanding of ASC 820 isn’t just about checking a compliance box. It’s about building investor trust, preparing for audit readiness, and supporting smarter decisions around valuations and equity planning.

ASC 820 lays the groundwork for fair value measurement, but equity management for CFOs goes well beyond compliance. Today’s finance leaders are responsible for managing the full equity lifecycle: cap tables, equity grants, 409A valuations, ASC 718 reporting, audit prep, and more. With the right tools, CFOs can move from reactive reporting to proactive strategy, turning equity into a lever for growth, alignment, and informed decision-making.

When venture capital firms need to perform ASC 820 evaluations, having organized, up-to-date information from their portfolio companies makes the process significantly smoother. If you run one of those companies, Pulley helps ensure you're prepared—offering clean cap tables, recent 409A valuations, and documentation that investors and auditors can trust.

Pulley helps startups by delivering:

• Audit-ready 409A valuations prepared in-house
• Transparent reporting that clearly documents Level 3 assumptions clearly for 409A valuations and ASC 718 compliance
• Migration support for teams switching from Carta or manual processes—with concierge onboarding that gets you up and running fast

Unlike outsourced valuation firms, Pulley’s process is built for CFOs who need defensibility, documentation, and clarity—not just a PDF.

Book a free demo today to see how Pulley can support your equity management needs and make life easier for your investors when it matters most.

Note: Pulley specializes in 409A valuations and equity reporting for private companies. While we don’t provide ASC 820 valuations, our platform is built to support CFOs with the tools and insights they need to manage equity confidently and stay audit-ready.

ASC 820 FAQs

What is GAAP?

Generally Accepted Accounting Principles (GAAP) is the official standard for financial reporting in the United States, and it sets the basic rules you follow to prepare financial reports. It’s the starting point everyone uses to keep reports clear and consistent. 

US GAAP helps auditors, boards, and buyers read your numbers without guessing. Public companies are required to follow it. Private companies typically don’t, but most do once they hit later funding rounds.

GAAP makes your balance sheet readable. If you’re planning a secondary, acquisition, or exit, GAAP helps you get there faster, providing consistency and reducing risk.

What is the Accounting Standards Codification (ASC)?

The Financial Accounting Standards Board (FASB) organizes GAAP rules and methodologies into one source: the Accounting Standards Codification. 

Since 2009, this system has split each rule into numbered topics. The ASC organizes accounting rules into clear topics with numbers. You can quickly find what you need without digging through pages of scattered info.

How does GAAP define fair value?

ASC 820, one of the ASC’s key topics, provides the framework for measuring fair value. It 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 informed, willing market participants at the measurement date.

This “market participant” lens is what distinguishes ASC 820: It prioritizes external, market-based inputs over internal estimates.

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