The Financial Accounting Standards Board has finalized new guidance that provides a practical solution to measuring the fair value of certain alternative investments.

FASB’s Accounting Standards Update 2009-12 amends ASC 820-10 Fair Value Measurements and Disclosures to clear up uncertainty about how to measure fair value of investments in certain entities that calculate net asset value per share. The guidance is intended to shore up diversity in how investors estimate the fair value of alternative investments such as hedge funds, private equity and venture capital funds, real estate funds, offshore fund vehicles, and funds of funds.

According to FASB, many investors in such complex funds often rely on net asset values per share provided to them by the fund managers as indicators of current fair value. Others, however, believe net asset values should be further adjusted to account for attributes such as restrictions on redemption or transaction prices based on broker arrangements.

FASB determined in some cases it made sense to allow the net asset value to equal the fair value for financial reporting purposes, assuming certain conditions apply. The accounting standards update provides guidance on those conditions. It also maps out some disclosure requirements addressing, for example, redemption restrictions and any unfunded commitments an investor may have in the investment. The disclosure requirements apply to all investments within the scope of the guidance, whether the entity uses the net-asset-value measurement approach or not.

While the guidance provides the practical expedient of allowing net asset value to equal fair value, it specifically prohibits the practice when an entity deems it “probable” that the investment will be sold at a price other than net asset value. A recent alert from Deloitte & Touche notes the criteria are similar to those used to determine when a long-lived asset must be classified as held for sale.