Lookout: Accounting & Auditing Outlook

Transcription

1 Lookout: Accounting & Auditing Outlook Joshua Partlow and David White March 8, 2016

2 Speaker Introduction 2 Panelists Joshua Partlow, CPA Audit Partner Johnson Lambert LLP David White, CPA, ACI VP & Regional Director AIG US Captive Operations 2

3 3 Learning Objectives GAAP Accounting Standards Effective in the Short-Term On the Horizon Statutory Accounting Standards Not used by majority of captives Minimal applicable changes this year Excluded from this presentation 3

4 GAAP Accounting Standards Effective in the Short-term 4

5 Conference In-Session Polling 5 1. Search CICA International Conference in your app store or if you have already downloaded the Conf. App, open it. 2. Select the SCHEDULE Icon 4. Select Tuesday, March 8th 5. Select 11:15am- 201: Lookout-Accounting & Auditing Outlook 6. Look for LIVE POLLS and select Question 1 *Please refrain from answering additional polling questions until prompted. 5

6 6 Polling Question Are Captive Insurance Companies Typically Public Business Entities (PBE) or Non-Public Business Entities (Non- PBE)? A. PBE s B. Non-PBE s C. I don t know 6

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8 GAAP Standards Updates effective for nonpublic business entities (PBE) for annual periods beginning after December 15, 2015 with potential for more impact to Insurance Industry: ASU Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share Removed NAV Securities from FV Hierarchy when practical expedient is used ASU Income Statement Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ASU Presentation of Financial Statements Going Concern: Disclosures of Uncertainties about an Entity s Ability to Continue as a Going Concern 8

9 GAAP Update Going Concern ASU Going Concern Significant change in practice Guidance now in audit standards and GAAP Requires management to perform the going concern analysis Requires certain disclosures when criteria are met Calendar Year End PBE 2016 NON-PBE

10 GAAP Update Going Concern Changes to measurement approach Defines substantial doubt Required in interim periods Look forward period one year from opinion date (date financial statements are issued or available to be issued) Current GAAS one year from measurement date Changes 10

11 GAAP Update Going Concern Audit Standards Board issued AU-C Section 9570 Interpretations to address how auditors should respond Expect long-term changes to AU-C 570 to follow and align with international and PCAOB Standards Interpretations: Reasonable period of time when financial reporting framework (FRF) requires management to assess going concern, auditor would perform assessment over same look forward period Interim Periods when a FRF requires management to assess and disclose in an interim period the auditor is required to test and consider management s assessment 11

12 GAAP Update Cloud Computing Arrangements ASU Customer s Accounting for Fees Paid in a Cloud Computing Arrangement If both requirements are met, a company can capitalize the associated fees, similar to how they would account for any other software fees. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Calendar Year End PBE Q NON-PBE

13 GAAP Update - Insurance Contracts Long-term convergence project with IASB Began in 2008; multiple exposure drafts Convergence efforts abandoned in 2014 Short-duration insurance contracts: Targeted improvements to disclosure requirements Most property and casualty, health lines Long-duration: Targeted improvements including recognition, measurement, presentation and disclosure Most life and some warranty lines 13

14 GAAP Update - Insurance Contracts ASU Disclosures about Short-Duration Contracts Visit JL Resource Center to replay our 1 Hour Enhanced Loss Disclosures for P&C Companies webinar: Calendar Year End PBE 2016 NON-PBE

15 15 Short-Duration - Why are we Discussing Now? ASU requires retroactive application by providing comparative disclosures for each period presented Will require most companies to accumulate information beginning in 2008 for presentation in the 2017 disclosures 15

16 Short-Duration - Key Disclosures Changes 16 Net loss development AY paid & incurred Claim counts IBNR + expected development Reconciliation of incurred & paid development Average annual % payout 16

17 Short-Duration - Key Disclosures Changes 17 Changes in judgments or methodologies Discounting Example Disclosures available in Webinar on JL Resource Center and in the Exhibits of the FASB ASU 17

18 18 Why are Disclosures Included as RSI? Concerns raised over auditor independence Would auditor independence be required for all 10 years of historical data presented? Previous claims system implementation work when not the auditor could cause problems later Potential concerns in business combinations, large multi reporting entities AICPA Professional Ethics Executive Committee (PEEC) and others began looking into this question Existing model under GASB where similar disclosures are made as Required Supplementary Information (RSI) FASB revised to indicate detail other than for the current reporting periods are supplementary information 18

19 19 Independence The AICPA issued an interpretation to AU-C Section 9180 in August 2015, which clarifies Auditors are only required to be independent with respect to the period being audited and covered by the auditors opinion Opinion does not generally extend to RSI as RSI is not part of the basic financial statements Work conducted by auditors on RSI, under GAAS is limited to: Inquiry of management Comparison of RSI for consistency with knowledge gained in audit of the basic financial statements Auditor procedures and independence consideration would be different if opinion was extended to cover RSI or RSI was directly included in the financial statement disclosures 19

20 20 Short-Duration Implementation Considerations How to aggregate (by line of business, geography, segment, commercial vs. personal lines, etc.) Reinsurance LPTs / Novation how do you reflect new reserves Reinsurance over multiple lines Claims counts companies measure differently Data integrity First time presenting this much detail Potential for different aggregation than Schedule P Consolidation Holding Co. vs. Captive Structures Acquisitions Impact on development patterns How do you reflect new reserves 20

21 21 Polling Question How difficult will it be for your Company to generate the new 10 year loss disclosures? A. Easy We will leverage our actuarial report and NAIC Schedule P B. Moderate Our actuary will need to help us but it is achievable C. Difficult I am not sure where to start D. Impossible I do not have access to any of this data am not sure I can get it i.e. certain fronted programs 21

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23 23 Insurance Contracts: Long-Duration FASB still deliberating Mid to late 2016 issuance date is expected Will likely push effective date to 2019 or 2020 It s clear there will be significant changes from current model Building block approach Update of assumptions annually for traditional, limited payment and participating contracts Deferred acquisition costs Discounting 23

24 2015 GAAP Standards 24 The following are new GAAP Standards effective for non PBEs for annual periods beginning after December 15, 2014: ASU Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists ASU Investments Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects ASU Receivables Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ASU Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ASU Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ASU Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures 24

25 2016 GAAP Standards The following are other new GAAP Standards effective for non PBEs for annual periods beginning after December 15, 2015: ASU Compensation Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ASU Receivables Troubled Debt Restructurings by Creditors: Classification of Government-Guaranteed Mortgage Loans Upon Foreclosure ASU Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ASU Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments 25 25

26 GAAP Accounting Standards On the Horizon 26

27 27 Polling Question What pronouncements on the Horizon are you most interested in hearing about? A. Financial Instruments (Investments) - Measurement B. Financial Instruments (Investments) - Impairment C. Revenue Recognition D. Leases E. None of the above it s lunch time! 27

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29 29 Long-term GAAP Projects Many large scale projects are being finalized with expected later implementation a little ways out on the horizon Financial Instruments Revenue Recognition Leases 29

30 30 Financial Instruments (FI) FASB completed deliberations in November 2015 and final standards issued in early 2016 for: Classification and Measurement Issued ASU January 2016 Credit Impairment Still Pending Late 2012 / 2013 ED s for both Hedging Deliberations still in process; final decisions expected later in

31 31 FI Classification & Measurement Effective dates set at November 2015 meeting: PBE Annual periods beginning after December 15, 2017 Non PBE Annual periods beginning after December 15, 2018 Model slightly different than 2013 Exposure Draft Retains Held to Maturity (HTM), Available for Sale (AFS) and Trading Scraps cash flow and business model approach in ED Retains Fair Value (FV) Option 31

32 32 FI Classification & Measurement (continued) Key Change - Equity Investments Now required to be measured at FV through net income No OCI for equity securities Regardless of classification (HTM, AFS, Trading) Increased volatility to income statement for insurance entities Practical expedient added for equity investments without readily determinable FV 32

33 33 FI Classification & Measurement (continued) Other changes of note: Securities at amortized cost (AC) on balance sheet no longer require FV disclosures Retrospective transition model i.e. cumulative-effect adjustment to beginning equity at beginning of the earliest reporting period presented 33

34 34 FI Credit Impairment Effective dates set at November 2015 meeting: PBE Annual periods beginning after December 15, 2018 Non PBE Annual periods beginning after December 15, 2019 One year later than Classification & Measurement Key concepts: Replaces today s incurred loss model with expected loss model Allowance model vs. today s impairment Retains OTTI model for AFS debt securities with modifications Applicable to all financial instruments 34

35 35 FI Credit Impairment (continued) Entities would apply new current expected credit loss (CECL) model to: HTM - debt instruments at AC Loans (Captive loan backs) Receivables (trade and reinsurance) Lease receivables recognized by lessors Loan commitments Certain financial guarantees Current impairment models Loans and receivables ASC and ASC Certain acquired loans and securities ASC Debt securities ASC Certain beneficial interests ASC

36 36 FI Credit Impairment (continued) CECL Model Reserve for current estimate of all contractual cash flows not expected to be collected Will result in an impairment reserve similar to a loan loss provision or allowance for doubtful accounts Can move up or down as facts and circumstances change 36

37 FI Credit Impairment (continued) 37 Impairment model for AFS debt securities Step 1 Determine whether debt security is impaired Is FV less than AC? Step 2 Evaluate whether an impairment is other than temporary revised to exclude: Length of time and extent FV has been less than AC Recoveries or additional declines in FV after reporting date Step 3 Measure and recognize impairment allowance rather than OTTI Impairment allowance will change with credit quality of issuer Amortization no longer prospectively changed when expectations of cash flow change i.e. AC not revised for the impairment allowance 37

38 38 Revenue Recognition FASB issued ASU in May 2014 Later deferred by ASU due to complexity Current effective date: PBE Annual periods beginning after December 15, 2017 Non PBE Annual periods beginning after December 15, 2018 Given complexity: FASB / IASB created a Joint Transition Resource Group for Revenue Recognition (TRG) Discussing and providing guidance on implementation issues AICPA 16 Industry Task Forces Developing non authoritative industry guidance 38

39 39 Revenue Recognition (continued) Good News Insurance contracts (under ASC 944) are specifically exempt! Bad News Insurance industry is still impacted Third-party administrators (TPA) Asset management Managed care organizations (ASO) Insurance and reinsurance brokers 39

40 40 Revenue Recognition (continued) Contracts with multiple components Insurance contracts with imbedded service components Differing opinion on whether to: Scope entire contract out, or Bifurcate non-insurance component Question submitted to the FASB TRG for consideration 40

41 Revenue Recognition Model Recognize revenue to depict the transfer of services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those services: Step 1 Identify the contract with the customer Step 2 Identify separate performance obligations Step 3 - Determine the transaction price Step 4 Allocate the transaction price to the separate performance obligations Step 5 Recognize revenue when or as each performance obligation is satisfied Multiple items to consider in each step for insurance service organizations 41 41

42 42 Leases ASU ASU Issued February 25, 2016: PBE Annual periods beginning after December 15, 2018 Non PBE Annual periods beginning after December 15, 2019 Highly contested 3 Discussion Papers One of my great ambitions before I die is to fly in an aircraft that is on an airline s balance sheet. Sir David Tweedie, IASB Chair April

43 43 Source: FASB In-Focus 2/25/

44 44 Leases (continued) Key Concepts from Lessee prospective: Lessees will recognize: A right of use (ROU) asset at cost of present value (PV) of lease payments adjusted for additional direct costs, prepayments to lessor or lease incentives A lease liability at PV of expected lease payments Two models for subsequent measurement Type A similar to capital leases Type B similar to operating leases Optional exemption for short-term leases 44

45 Leases (continued) 45 45

46 Leases (continued) Type A Lease (Fiance Lease) Type B Lease (Operating Lease) 46 Lease Liability = beginning liability accreted based on interest method Discount rate determined at lease commencement Reduce for lease payments made ROU Asset Amortize on straight-line basis over shorter of lease term or asset useful life Financial Impact: Generally front-loads expense - similar to loan amortization Separate interest expense and amortization expense on income statement Results similar to a financed asset purchase Lease Liability = PV of remaining lease payments Discount rate determined at lease commencement ROU Asset = lease liability adjusted for prepaid or accrued rents, any lease incentives received and initial direct costs Financial Impact: Generally straight-line expense Single line of lease or rent expense on income statement 46

47 47 Other Thoughts for Captive Accountants Key Concepts from Captive Manager prospective: More Medical Stop Loss captives = Captives with need to comply with HIPAA = Need to prevent unauthorized access to Protected Health Information (PHI) = Business Associate Agreements (BAA) possibly with multiple service providers Policies & Procedures around minimizing access and sharing in a secure way when necessary Proof of insurance 47

48 48 Key Items to Remember Going Concern In 2016 management takes 1 st shot Cloud Computing Helpful new guidance Big Changes to come: Expanded loss disclosures Equities mark to market through net income 2019 New Rev Rec for non-insurance revenue 2020 Investment impairment model changes 2020 Lease accounting change 48

49 Thank you for your Participation! 49 Josh Partlow Audit Partner Johnson Lambert LLP David White VP & Regional Director AIG US Captive Operations 49