Under FRS 102 paragraph 11.14(d), shares in a company that is not a subsidiary, associate or joint venture are measured at fair value through profit or loss if they are publicly traded or their fair value can otherwise be measured reliably, and at cost less impairment if it cannot. For unquoted shares the deciding question is reliability: Section 2A says a valuation is reliable if the range of reasonable estimates is not significant, or if the probabilities across that range can be reasonably assessed. Where neither is true, the investment stays at cost and is tested for impairment.

Which investments does this cover?

Paragraph 11.8(d) treats an investment in a non derivative financial instrument that is equity of the issuer, such as most ordinary shares and certain preference shares, as a basic financial instrument. The rules on this page apply to minority stakes in private companies held by trading companies, family investment companies and holding companies, for example a 5% stake in a customer, a supplier or a start up.

They do not apply to shares in subsidiaries, associates or joint ventures, which paragraph 11.7(a) sends to Sections 9, 14 and 15; for subsidiaries see investments in subsidiaries in the parent’s accounts. Paragraph 11.14(d) also gives a separate policy choice, cost less impairment or either fair value model, for investments in another group entity that fall within Section 11, such as a holding in a fellow subsidiary. Shares with features that make them non basic are dealt with under Section 12.

When is fair value reliable for unquoted shares?

Paragraph 11.14(d)(iv) requires fair value through profit or loss where the shares are publicly traded or their fair value can otherwise be measured reliably, cross referring to paragraph 2A.19. Paragraph 11.14(d)(v) requires all other such investments to be measured at cost less impairment. There is no free choice for an unquoted stake outside the group: the outcome depends on whether a reliable value exists.

Section 2A sets the test:

  • A valuation technique would be expected to give a reliable measure if it reasonably reflects how the market could be expected to price the asset and its inputs reasonably represent market expectations and the risk and return factors in the asset (2A.19).
  • A fair value chosen from a range of reasonable valuations is reliable if the range is not significant, or if the probabilities of the estimates within it can be reasonably assessed and used to pick the most appropriate figure (2A.21).
  • Paragraph 2A.22 says it is normally possible to estimate the fair value of an asset acquired from an outside party, but that where the range is significant and the probabilities cannot be reasonably assessed, the entity is precluded from measuring the asset at fair value.

A recent arm’s length funding round, a firm offer, or a profitable company with plenty of listed comparables will often support a reliable figure. An early stage company with no revenue, no recent transactions and binary outcomes may not.

How is fair value estimated?

Fair value is a market based measurement, not an entity specific one (2A.3). Paragraph 2A.15 sets a three step order of evidence:

  1. an unadjusted quoted price for an identical or comparable asset in an active market;
  2. failing that, the price of a recent orderly transaction in an identical or comparable asset, although this may not be reliable if economic circumstances have changed significantly or a significant period has passed since the transaction; and
  3. failing both, another valuation technique aimed at the price an orderly sale between market participants would achieve at the measurement date.

Paragraph 2A.16 groups techniques into the market approach (prices from comparable transactions or businesses, such as earnings multiples), the cost approach, and the income approach (present value techniques such as discounted cash flows). Paragraph 2A.17 requires techniques to be applied consistently, with a change treated as a change in accounting estimate. In practice a valuer of a private company stake will typically start from the latest round price, test it against multiples of comparable businesses, and adjust for the size of the stake and any rights attached to the shares.

What happens if a reliable value stops being available?

Paragraph 2A.23 says that if a reliable measure of fair value is no longer available for an asset measured at fair value, its carrying amount at the last date it was reliably measured becomes its new cost, and it is measured at that cost less impairment until a reliable measure becomes available again. Paragraph 11.44 requires the company to disclose that fact and the carrying amount of the instruments affected. This often happens when an investee’s funding dries up and no later transactions occur.

How are cost, transaction costs and dividends treated?

Paragraph 11.13 measures a financial asset initially at transaction price, adjusted for transaction costs except where the asset is subsequently measured at fair value through profit or loss. Legal fees on an investment that will be held at fair value are therefore expensed, while on an investment held at cost they are added to cost.

Dividends from equity investments are recognised in profit or loss only when the right to receive payment is established, it is probable that the economic benefits will flow, and the amount can be measured reliably (11.14A).

How is an investment at cost tested for impairment?

Paragraph 11.21 requires an assessment at each reporting date of whether there is objective evidence of impairment, with any loss charged to profit or loss immediately. Paragraph 11.22 lists loss events such as significant financial difficulty of the issuer, and paragraph 11.23 adds significant adverse changes in the issuer’s technological, market, economic or legal environment. Under paragraph 11.24(a), every equity instrument must be assessed individually, regardless of size.

For an investment held at cost less impairment, paragraph 11.25(b) measures the loss as the difference between the carrying amount and the best estimate, which will necessarily be an approximation, of the amount, which might be zero, that the company would receive if it sold the asset at the reporting date. Paragraph 11.26 allows a reversal where the decrease can be related objectively to a later event, capped at what the carrying amount would have been with no impairment.

What does this look like in numbers?

Illustration only. On 1 April 2026 Holdco invests £100,000 for a 5% stake in a private software company in a funding round led by an outside investor, paying £4,000 in legal fees. Holdco concludes that fair value can be measured reliably, so the stake is recorded at £100,000 and the £4,000 is expensed.

At Holdco’s year end, 31 March 2027, the investee has just completed a further arm’s length round at a price per share 50% higher, and there has been no significant change in circumstances since. Holdco measures its stake at £150,000 and recognises a fair value gain of £50,000 in profit or loss.

If instead the investee had raised no new money, was missing its plan, and Holdco’s adviser could only give a very wide range of values with no basis for weighting them, paragraph 2A.23 would apply: the last reliable value would become cost and Holdco would then test for impairment under paragraph 11.25(b).

Can the fair value gain be paid out as a dividend?

Paragraph 40 of Schedule 1 to the accounts regulations requires fair value movements on financial instruments to go through the profit and loss account, overriding the normal rule that only realised profits are included (FRS 102 A3.27). Paragraph A3.28 says companies may transfer such amounts to a separate non distributable reserve but are not required to. The ICAEW and ICAS guidance TECH 02/17BL, referred to in paragraph A3.29, treats a fair value gain as realised only to the extent the change is readily convertible to cash (paragraph 3.9(c)). A gain on unquoted shares will often fail that test, so it should be excluded when working out distributable reserves; see unlawful dividends.

What else should preparers watch for?

  • Disclosure. Paragraph 11.43 requires the basis for determining fair value and, where a valuation technique is used, the assumptions applied for each class.
  • Micro entities. FRS 105 paragraph 9.8(a) measures all investments in ordinary or preference shares at cost less impairment, with no fair value option; see micro entity accounts.
  • The 2026 changes. Section 2A came in with the Periodic Review 2024 amendments, which apply for accounting periods beginning on or after 1 January 2026 (paragraph 1.37(b)), and paragraph 1.41 requires Section 2A to be applied prospectively from the date of initial application. See FRS 102 2026 amendments.
  • Common errors. Leaving an unquoted stake at cost out of habit when a recent round gives a reliable price; marking up to a round price without considering whether circumstances have changed; capitalising transaction costs on a fair value investment; treating fair value gains as distributable; and assessing small equity holdings collectively rather than individually.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.