Accounting Standard Updates
12 Days of SSAP: Fair Value Measurement of Equity Securities Subject to Contractual Sales Restrictions
Hot Take:
JLK Rosenberger is carrying on our holiday tradition of taking a new perspective on a holiday classic – the Twelve Days of Christmas. Rather than filling your head with turtle doves and gold rings, we are focusing on the latest changes to SSAP and how they will impact your insurance entity in 2024 and beyond.
This GAAP update streamlines how equity securities are reported when contractual sale restrictions are present. Statutory quarterly and annual statement preparers will want to peruse the modified statutory accounting methodology for these sale restriction instances.
Full Article
This update is a response to observed diversity in practice related to whether contractual sale restrictions should be considered in the measurement of the fair value of equity securities that are subject to such restrictions. It was observed that some entities use a discount for contractual sale restrictions when measuring fair value. In contrast, others view the application of such a discount as inconsistent with the principles of ASC 820.
ASU 2022-03 clarified the guidance in ASC 820 on the fair value measurement of an equity security with such restrictions and required some specific disclosures.
As amended by the update, when measuring fair value, an entity should:
- Consider sale restrictions that are characteristics of equity security (e.g., a restriction resulting from a security that is not registered for sale with a national securities exchange or an over-the-counter market when other securities from the same class of stock are registered for sale).
- Not consider sale restrictions that are characteristics of the equity security holder (e.g., a lock-up agreement, a market stand-off agreement, or a sale restriction provision within an agreement between certain shareholders).
Below are the disclosures required under the new guidance:
- the fair value of such equity securities reflected in the balance sheet,
- the nature and remaining duration of the corresponding restrictions, and
- any circumstances that could cause a lapse in the restrictions
Statutory Treatment
NAIC responded by adopting ASU 2022-03 with modification to exclude the new disclosure requirements. The adopted revisions clarify that those items restricted as a component of the sale should be captured as restricted assets per SSAP No. 1 and are subject to admittance considerations under SSAP No. 4. As under the original ASU, the clarification mainly applies to two specific scenarios, one where the restriction is based on the entity holding the equity security and one where the restriction is a characteristic of the equity security.
Effective Date:
- Public companies: fiscal years beginning after December 15, 2023
- Nonpublic companies: fiscal years beginning after December 15, 2024
