Embed Size (px)
Citation preview
Page 2
Agenda
► Insurance contracts► Overview
► Short-duration insurance contracts
► Long-duration insurance contracts
► Revenue recognition► Implications for insurers
► Other topics► Reporting discontinued operations
► Simplification initiative
► Private company hedge accounting
► Consolidation
► Going concern
► Financial instruments – classification and measurement
Page 3
Insurance contracts overview
Page 4
IASB continues deliberations; plans to issue final standard in 2015
Insurance contractsOverview
Short-duration disclosures
Deliberations end August 2014
Out of scopeContracts written by non-insurance entities
FASB re-deliberates plan in February 2014 and decides to focus on targeted improvements
June 2013FASB and IASB issue exposure drafts
Long-duration measurement
Deliberations begin August 2014
Page 5
Short-duration insurance contracts
Page 6
Short-duration insurance contractsObjectives
► Increase the transparency of management’s significant estimates, improve financial statement comparability and enable financial statement users to understand the following:
► The amount and uncertainty of cash flows arising from insurance liabilities
► The nature and extent of risks arising from short-duration insurance contracts
► The timing of cash flows arising from insurance liabilities
Targeted improvements to the disclosures for short-duration contracts
Page 7
Short-duration insurance contractsWhat’s new
►In 2015, the FASB made final changes to its proposal on new disclosures about short-duration insurance contracts. The Board made the change in response to feedback it received on an initial draft of the Accounting Standards Update it circulated to certain constituents last year.
►The Board tentatively decided that some of the new disclosures could be presented as supplementary information rather than in the notes to the financial statements.
►The Board also modified its earlier decision to require insurers to disclose in the financial statements information about claim frequency and incurred but not reported liabilities.
Page 8
Short-duration insurance contractsWhat’s new
►Effective for annual reporting periods beginning after December 15, 2015 for public business entities and interim periods beginning after December 15, 2016. For all other entities, the effective date would be a year later. Early adoption would be permitted.
►The FASB is expected to issue a final standard in the second quarter of 2015
►To make these disclosures, insurers may need to collect and disclose more information than they do now. Insurers may also need to aggregate data differently.
►Management will have to use judgment when determining the appropriate level of disaggregation and the number of years to present in the claims development tables.
Page 9
Short-duration insurance contractsOther disclosures
► Liabilities for unpaid claim and claim adjustment expenses presented at present value disclosures► Existing GAAP disclosure requirements include:
► Carrying amount of liabilities that are presented at present value► Range of interest rates used to discount these liabilities
► Board’s recent decisions to enhance disclosures► Aggregate amount of discount deducted from the liabilities► For each period presented in the statement of comprehensive income,
the amount of interest accretion recognized and line item in which the interest accretion is classified
► Material changes in judgments► Disclose the reasons and effects on the financial statements
Page 10
Short-duration insurance contractsHealth insurance claim disclosures
► Consistent disclosure requirements as short-duration insurance contracts except:► Average annual percentage payout of claims is not required► Rollforward of the liability for unpaid claims and claim adjustment
expenses► Health insurance claims should be separated from other insurance
claims► Apply the disaggregation principle for this disclosure
► The incurred but not reported liabilities included in the liability for unpaid claims and claim adjustment expenses in interim financial statements
Page 11
Short-duration insurance contracts Disaggregation principle
► For disclosures about claims development and other disclosures about claims liabilities:► Useful information shall not be obscured by either the inclusion of
a large amount of insignificant detail or the aggregation of items that have different characteristics
► Consider how information about the liability for unpaid claims and claim adjustment expenses has been presented for other purposes
► Type of coverage (for example, major product line)
► Geography (for example, country or region)
► Reportable segment as defined in Topic 280 on segment reporting
► Market or type of customer (for example, personal and commercial lines of business)
► Claim duration (for example, claims that have short settlement periods or claims that have long settlement periods)
Example categories (any or all of the following)
Page 12
Long-duration insurance contracts
Page 13
Long-duration insurance contractsObjectives
► Increase the decision usefulness of the information about the nature, amount, timing, and uncertainty of cash flows related to long-duration insurance contract assets and liabilities, and the effect on the financial statements.
► Improve the financial statement comparability of insurance entities that issue long-duration contracts
Targeted improvements to the accounting for long-duration insurance contracts
Page 14
Long-duration insurance contractsWhat’s new
► The FASB continued discussions on long-duration insurance contracts in 2015, focusing on simplifying amortization of deferred acquisition costs.
► The Board tentatively decided that deferred acquisition costs, except for certain investment contracts, would be amortized over the expected life of a book of contracts in proportion to the respective amount of insurance in force.
► If the amount of insurance in force is variable and cannot be reliably predicted or readily determined, the deferred acquisition costs would be amortized on a straight-line basis in proportion to the number of outstanding contracts.
► The FASB began deliberations on the liability for future policy benefits covering the following topics: annual unlocking of assumptions for traditionally locked-in reserves, setting the discount rate, and removing the premium deficiency test requirement.
Page 15
Long-duration insurance contractsTentative decisions to date
► Update all assumptions used in calculating the liability for future policy benefits for traditional long-duration insurance contracts, limited payment contracts, and participating life insurance contracts ► Annual updates during the fourth quarter► Recognize the effects of changes in assumptions in net income
► Removed the requirements for:► Including a provision for adverse deviation (PAD)► Performing a loss recognition (premium deficiency) test
► Apply the proposed guidance for updating assumptions used in measuring the additional liability for non-traditional long-duration insurance contracts
Page 16
Long-duration insurance contractsTentative decisions to date (continued)
► Additional disclosures would be provided about the liability for future policy benefits:► Disaggregated balances of the liability► Weighted-average discount rates used, in time bands, for the
disaggregated balances of the liability ► Disaggregated quantitative and qualitative information about the
methods and inputs used► Disaggregated reconciliations from the opening to the closing
balance of the liability for future policy benefits, with separate disclosure of changes in the liability for future policy benefits due to:► New contracts ► Benefit payments ► Changes in assumptions► Derecognition of contracts
Page 17
Revenue recognition
Page 18
Revenue recognitionWhat’s new
►The FASB decided to propose a one-year deferral of the effective date for the new revenue recognition standard. The FASB plans to issue an exposure draft on the proposal and expects to seek public comment with a 30-day comment period. If approved, entities may use the new effective date or adopt the standard as early as the original public entity effective date.
►TRG members discussed a number of other implementation issues in the periodic 2015 meetings and have reached general agreement on many topics. It is expected the TRG will continue to meet periodically in 2015. While the unofficial views of the members of the TRG are non-authoritative, they represent the latest thinking on each topic, and we believe companies should consider them as they continue to implement the new standard.
►Public entities should consider how they will communicate the effects of the new standard with investors and other stakeholders, including their plans for disclosures about the effects of new accounting standards discussed in SEC Staff Accounting Bulletin (SAB) Topic 11.M.
Page 19
Revenue recognitionImplementation for insurance companies
► Specific scope exception for insurance contracts within the scope of ASC 944
► Services that are not exempt from the standard, among others:► Activities performed by insurance brokers and agents► Third-party administrator (TPA) arrangements► Managed Care entities under ASC 954
► Staff Accounting Bulletin (SAB) Topic 11.M ► Requires disclosure of the effects of recently issued accounting
standards► An entity’s disclosures on the new standard will likely evolve as
more information about the effect is known► Entities are required to consider these disclosure requirements in
their next report filed with the SEC
Page 20
Revenue recognition – final standardThe five-step model
► Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
1) Identify the contract(s) with the customer2) Identify separate performance obligations (building vs.
rooms of a building – customer expectation)
3) Determine the transaction price4) Allocate transaction price to separate performance
obligations5) Recognize revenue when (or as) each performance
obligation is satisfied.
Page 21
Revenue recognitionWhat can you do now?
► Understand the magnitude of the changes to your entity from both a financial statement and business perspective► Identify common transactions and implementation issues
► Create a list of services provided► Determine whether services are in scope or out of scope
► Establish a project management plan► Consider IT implications► Determine training requirements for individuals responsible for key
judgments and estimates
► Establish a process for gathering appropriate data to comply with the new standard
► Communicate your questions on the guidance through the implementation groups
Page 22
Other topics
Page 23
Reporting discontinued operations and disclosures of disposals of components of an entity
•The guidance raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures for both discontinued operations and disposals of individually significant components that don’t qualify as discontinued operations. It also allows entities to have significant continuing involvement and continuing cash flows with a discontinued operation and eliminates substantially all of the scope exceptions that currently exist.
•The guidance defines a discontinued operation as (1) a component of an entity (or group of components) that has been disposed of by sale, disposed of other than by sale, or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition.
Page 24
Simplification initiative
•The FASB completed redeliberations on its project to simplify the measurement date for defined benefit plan sponsors that have a fiscal year end that does not fall on a month end and expects to issue final guidance shortly.
•The FASB issued two proposals to simplify income tax accounting. One proposal would require companies to immediately recognize income tax effects on intercompany transactions in their income statements. The other proposal would require all deferred tax assets and liabilities to be classified as noncurrent on the balance sheet.
•The FASB decided to propose two practical expedients that private companies could use in accounting for share-based payments. For both public and private companies, the Board decided to align the classification guidance for put and call rights that are contingent on an event within an employee’s control. This completed the FASB’s deliberations on this project; an exposure draft is expected in the second quarter of 2015. −In a separate project, the FASB staff is researching improvements to the accounting for
share-based payments to nonemployees.
Page 25
Simplification initiative (continued)
•The FASB discussed the balance sheet classification of debt and tentatively decided that an entity should classify a debt as noncurrent when (1) the liability is contractually due to be settled more than 12 months after the balance sheet date or (2) the borrower has the contractual right to defer settlement of the liability for at least 12 months after the balance sheet date.
Page 26
Accounting for certain receive-variable, pay-fixed interest rate swaps — simplified hedge accounting approach – private companies
•The final guidance makes it easier for certain private companies to qualify for hedge accounting for interest rate swaps used to economically convert variable-rate debt into fixed-rate debt.
•Private companies can apply the simplified hedge accounting approach on a swap-by-swap basis to receive-variable, pay-fixed interest rate swaps that meet certain conditions.
•An eligible private company can assume that a hedging relationship is perfectly effective if the swap and the debt meet the conditions.
•The guidance permits companies to recognize swaps at their settlement value rather than their fair value and to complete formal hedge documentation up until the date on which the company’s annual financial statements are available to be issued.
Page 27
Consolidation
•In response to concerns that asset managers would have consolidated certain funds they manage under FAS 167, the FASB deferred FAS 167 for reporting entities that have variable interests in certain investment funds and said it would develop new guidance to respond to these concerns. As a result, reporting entities with variable interests in investment funds that qualify for the deferral have continued to apply FIN 46(R) to such funds.
•In redeliberations, the FASB abandoned the separate principal-agent analysis it had proposed in 2011 and decided instead to make targeted revisions to achieve the same objective.
•[Public business entities] Effective date: Annual periods and interim periods within those annual periods beginning after December 15, 2015.
•[Other entities] Effective date: Annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017.
•Early adoption is permitted.
Page 28
Consolidation (continued)
•The FASB issued final guidance (ASU 2015-02) that eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model.
•While the new guidance is aimed at asset managers, all reporting entities involved with limited partnerships or similar entities will have to re-evaluate these entities for consolidation and revise their documentation.
•Under the new guidance, a general partner will not consolidate a partnership or similar entity under the voting model.
Page 29
Going concern
•Management of public and private companies will be required to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern and, if so, disclose that fact. Management will also be required to evaluate and disclose whether its plans alleviate that doubt.
•The standard defines substantial doubt as when it is probable (i.e., likely) that the entity will be unable to meet its obligations as they become due within one year of the date the financial statements are issued (or available to be issued, when applicable).
•When making this assessment, management should consider relevant conditions or events that are known or reasonably knowable on the date the financial statements are issued (or available to be issued, when applicable).
•The assessment will be similar to the one auditors historically have made, but management will have to make the assessment and related disclosures for both annual and interim reporting periods (if the entity reports on an interim basis).
•The standard incorporates into US GAAP principles that exist in US auditing standards issued by the Public Company Accounting Oversight Board (PCAOB) and the American Institute of Certified Public Accountants (AICPA) and expands on those principles. Until now, the requirement to perform a going concern evaluation existed only in auditing standards.
Page 30
Going concern (continued)
•The AICPA issued an auditing interpretation that says the auditor should follow the guidance in the applicable financial reporting framework when (1) performing his/her own going concern assessment and (2) assessing possible effects on the financial statements and disclosures if the auditor concludes there is substantial doubt or if substantial doubt has been alleviated after consideration of management’s plans.
Page 31
Financial Instruments – classification and measurement
•The FASB decided to make targeted changes to current US GAAP guidance for classifying and measuring financial instruments rather than overhauling it, as it had proposed in 2013.
Effective date: An effective date has not yet been determined.•The FASB concluded redeliberations on its targeted amendments to the guidance for
classifying and measuring financial instruments, which include:•Investments in equity securities would be measured at fair value through net income, unless they
qualify for the proposed practicability exception.
•Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option would be recognized in other comprehensive income.
•Entities would make the assessment of the realizability of a deferred tax asset (DTA) related to an available-for-sale (AFS) debt security in combination with the entity's other DTAs. Under current US GAAP, entities also have the option to perform this evaluation separately from their other DTAs.
•Disclosure of the fair value of financial instruments measured at amortized cost would no longer be required for entities that are not public business entities.
•Eliminating the AFS classification for equity securities may make earnings more volatile for certain entities.
EY | Assurance | Tax | Transactions | Advisory
About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US.
EY is a leader in serving the global financial services marketplace Nearly 35,000 EY financial services professionals around the world provide integrated assurance, tax, transaction and advisory services to our asset management, banking, capital markets and insurance clients. In the Americas, EY is the only public accounting organization with a separate business unit dedicated to the financial services marketplace. Created in 2000, the Americas Financial Services Office today includes more than 4,000 professionals at member firms in over 50 locations throughout the US, the Caribbean and Latin America.
EY professionals in our financial services practices worldwide align with key global industry groups, including EY’s Global Asset Management Center, Global Banking & Capital Markets Center, Global Insurance Center and Global Private Equity Center, which act as hubs for sharing industry-focused knowledge on current and emerging trends and regulations in order to help our clients address key issues. Our practitioners span many disciplines and provide a well-rounded understanding of business issues and challenges, as well as integrated services to our clients.
With a global presence and industry-focused advice, EY’s financial services professionals provide high-quality assurance, tax, transaction and advisory services, including operations, process improvement, risk and technology, to financial services companies worldwide.
© 2015 Ernst & Young LLP.All Rights Reserved.
1307-1103314 NY
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
www.ey.com
