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Investments in equity securities of investment companies are required to be measured at fair value just like equity investments in other types of entities in the scope of ASC 820. Many investment companies maintain a net asset value (NAV) for purposes of subscriptions and redemptions or solely for reporting purposes. NAV may or may not be equal to fair value depending on the ability to transact at NAV. If the investment does not have a readily determinable fair value, as discussed in FV 6.2.2, it may qualify for a practical expedient by which reporting entities may instead use NAV, without adjustment, to measure investments in certain funds (e.g., hedge funds, private equity funds, real estate funds, venture capital funds, commodity funds, funds of funds).
FV 6.2.6 discusses when the NAV as a practical expedient is allowed. It is important for a reporting entity to determine whether it is using NAV as a practical expedient or NAV as fair value, since the required disclosures will differ depending on the answer.
Reporting entities with investments measured at NAV as a practical expedient need not disclose the investment’s level in the fair value hierarchy or any of the related disclosures in ASC 820-10-50-2. For example, there is no requirement to include these investments in the Level 3 rollforward. As such, the total fair values by level in the fair value hierarchy will not agree to the balance sheet. Therefore, reporting entities are required to provide a reconciliation of the fair value hierarchy disclosure to the balance sheet by disclosing the fair value of investments measured at NAV as a practical expedient.
Figure FSP 20-4 summarizes the typical level in the fair value hierarchy of investments measured at NAV in various scenarios.
Figure FSP 20-4
Fair value hierarchy of investments measured at NAV
Investment measurement
Typical level in the fair value hierarchy
Fair value equals NAV
Level 1
Fair value equals NAV, adjusted
Level 2 or 3
NAV as a practical expedient, unadjusted
N/A  measurements are not “fair value” under ASC 820
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