Accounting & Auditing Update: What changes are in store for your Company

Transcription

1 Accounting & Auditing Update: What changes are in store for your Company Presenter 1 Joshua Partlow, Johnson Lambert LLP Presenter 2 Patti Palitto, Aon Risk Solutions August 14, 2013 VCIA All Rights Reserved 0

2 Agenda New 2013 Accounting Standards FASB and AICPA Private Company Initiatives FASB/IASB Joint Projects Update Leases Accounting for Financial Instruments Insurance Contracts Other Items of Interest 1

3 New 2013 Accounting Standards 2

4 New Accounting Standards for 2013 Covered U.S. GAAP (FASB) Comprehensive income reclassification adjustment (ASU ) Not Covered not applicable for majority of captives U.S. GAAP (FASB) Balance sheet offsetting (ASU ) Intangibles ( ) Statutory (NAIC) Accounting for Postretirement Benefits Other Than Pensions (OPEBs) (SSAP 92) Accounting for Pensions (SSAP 102) Accounting for Transfers (SSAP 103) Share-Based Payments (SSAP 104) 3

5 ASU Comprehensive Income Comprehensive Income - Reporting of Amounts Reclassified Out of Accumulated OCI Effective for Q (Public), YE 2013 (Captive of public entities), YE 2014 (Others). Early adoption is permitted. Separately present for each component of other comprehensive income (face or note) Current period reclassifications out of accumulated OCI and other amounts of current-period other comprehensive income Present significant amounts reclassified out of accumulated OCI by the respective line items of net income Only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. (face or notes) 4

6 Entity XYZ Notes to Financial Statements Changes in Accumulated Other Comprehensive Income by Component For the Period Ended December 31, 201X (a) Unrealized Gains and Gains and Defined Losses on Losses on Benefit Foreign Cash Flow Available-for- Pension Currency Hedges Sale Securities Items Items Total Beginning balance ($1,200) $1,000 ($8,800) $1,300 ($7,700) Other comprehensive income before reclassifcations 3,000 2,500 (3,000) 1,000 3,500 Amounts reclassified from accumulated other comprehensive income (750) (1,500) 4, ,250 Net current-period other comprehensive income 2,250 1,000 1,500 1,000 5,750 Ending balance $1,050 $2,000 ($7,300) $2,300 ($1,950) (a) All amounts are net of tax. Amounts in parentheses indicate debits. 5

7 Entity XYZ Notes to Financial Statements Changes in Accumulated Other Comprehensive Income by Component For the Period Ended December 31, 201X (a) Amounts Reclassified from Affected Line Item in the Details about Accumulated Other Accumulated Other Statement Where Net Comprehensive Income Components Comprehensive Income Income is Presented Gains and losses on cash flow hedges $1,000 Interest income/(expense) Interest rate contracts (500) Other income/(expense) Credit derivatives 2,500 Sales/revenue Foreign exchange contracts (2,000) Cost of sales Commodity contracts 1,000 Total before tax (250) Tax (expense) or benefit $750 Net of Tax Unrealized gains and losses on available-for-sale securities $2,300 Relized gain/(loss) on sale of securities (285) Impairment expense Insignificant items (15) 2,000 Total before tax (500) Tax (expense) or benefit $1,500 Net of Tax Amortization of defined benefit ($2,000) pension items (2,500) Prior-service costs (1,500) Transition obligation (6,000) Total before tax Actuarial gains/(losses) 1,500 Tax (expense) or benefit ($4,500) Net of tax Total reclassifications for the period ($2,250) Net of tax 6

8 FASB and AICPA Private Company Initiatives 7

9 Private Company Initiatives Private Company Council FASB Definition of Nonpublic Entity AICPA SME framework 8

10 Private Company Council Determine whether modifications or exceptions to existing U.S. GAAP are required to address the needs of users of private company financial statements Focus on users of financial statements PCC will follow a framework which will be mutually developed with the FASB To serve as the primary advisory body to the FASB on private company considerations related to current FASB projects 9

11 FASB Definition of Non-Public Entity Discussion paper on Private Company Decision Making Framework issued in July 2012 How the Private Company Council (PCC) should develop standards for private companies Findings regarding what constitutes a non-public entity in Appendix B Rejected the notion of public accountability Concluded that stand alone AFS of a subsidiary of a public company should not be excluded from the definition of a nonpublic entity 10

12 Private Company Council Agenda Setting and Due Process

13 Private Company Council In June 2013 the FASB endorsed the first three PCC proposals Accounting for Identifiable Intangible Assets in a Business Combination Accounting for Goodwill Subsequent to a Business Combination Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Per FASB Chairman, endorsement of PCC proposals was a significant step in effort to address concerns about complexity and relevance of standards for private companies preparing GAAP Statements 12

14 AICPA SME s Financial Reporting Framework for Small and Medium Sized Entities Intended to reduce the costs and simplify the accounting for privately held SMEs that DO NOT require financial statements based on GAAP Framework was issued in June 2013 and is available for use Early reaction from FAF & NASBA 13

15 AICPA SME s Characteristics of SME s who could utilize such framework No regulatory reporting requirements requiring GAAP-based financial statements No intention of going public For-profit Does not require highly-specialized accounting guidance such as financial institutions and government entities 14

16 FASB/IASB Joint Projects Update 15

17 IFRS/FASB Update Will we ever adopt IFRS? SEC FASB Joint projects Leases re-exposure draft (ED issued May 2013) Accounting for Financial Instruments Impairment (ED issued Dec 2012) Classification and Measurement (ED issued Feb 2013) Hedging (2 nd or 3 rd Quarter 2013) Insurance Contracts exposure draft (June 2013) 16

18 FASB IFRS Leases FASB/IASB Revised Exposure Draft Exposure to improve quality and comparability of financial reporting Lessees would recognize assets and liabilities for leases of more than 12 months Stakeholders wanted dual-recognition approach real estate leases would be straight-line lease expense in income stmt (lessee does not consume a more than insignificant portion of asset) equipment and vehicles (consumption of a more than significant portion of the asset), lessee would report amortization of asset separately from interest on the lease liability Comments due by September 13, 2013 and likely 2016/2017 effective date 17

19 FASB IFRS Accounting for Financial Instruments 3 Separate Parts Recognition and Measurement Exposure draft issued in 2013 Impairment Exposure Draft issued at end of 2012 Hedging Exposure Draft expected in 2 nd or 3 rd Quarter of

20 FASB IFRS Accounting for Financial Instruments Recognition and Measurement of Financial Assets and Financial Liabilities FASB released a proposed single model for classifying and measuring all financial assets and liabilities. Comment period ended May 15, 2013 Amortized cost hold to collect principal and interest payments FV through OCI hold to collect principal and interest payments and for sale FV through net income all others; portfolio held for sale (equities) Liabilities = cost 19

21 FASB IFRS Accounting for Financial Instruments Financial Instruments Credit Losses Impact all entities that hold financial assets that are not accounted for at fair value through net income and are exposed to potential credit risk. Entities would be required to create an allowance for expected credit losses, based upon an estimate losses and related credit risks. Security by security basis and/or pool basis Securities carried at amortized cost, allowance for credit loss established and IS reflect credit deterioration (improvement) during reporting year Securities carried at FV (changes in OCI), balance sheet stays at FV; IS would credit deterioration (improvement) during reporting year Comment period ended April 30,

22 FASB IFRS Insurance Contracts Project is split in two phases: Phase I Definition of an insurance contract Disclosures Restrictions on changing accounting policies and use of existing GAAP Not applicable to self-insured liabilities Phase II Provide single measurement approach for Life, Health, P&C and reinsurance Recognition and derecognition Presentation 21

23 FASB IFRS Insurance Contracts IASB Exposure Draft (July 2010) and FASB Discussion Paper Preliminary Views on Insurance Contracts (Sept 2010) Defined Insurance Contract = Acceptance of significant Insurance Risk Insurance Risk = A contract does not transfer insurance risk if there is no scenario where PV of cash outflows can exceed PV of premiums IFRS 4 Insurance Contracts Interim Standard - Permits a wide range of recognition for items not yet determined by IASB 22

24 IASB Urgency? We are approaching the end of this important project to bring consistency and transparency to the accounting for Insurance contracts. The document published today responds to concerns expressed about non-economic volatility resulting from our previous proposals. We are now seeking further feedback before finalizing this much-needed Standard. Hans Hoogervorst, Chairman of the IASB 23

25 FASB Point of View The proposed standard is intended to bring greater consistency and relevance to the accounting for contracts that transfer significant risk between parties The proposal would provide decision-useful information about earnings, financial position and the drivers of performance for companies entering into these contracts. FASB Chairman Leslie F. Seidman. 24

26 FASB IFRS Insurance Contracts FASB & IASB IASB - Issued Revised Exposure Draft on June 20, 2013 FASB Issued ED on June 27, 2013 Comments Due by October 25 th 2013 Both Boards to Hold Round Tables 2014 Redeliberate Proposals 2015 Issuance of Final Standard Estimated Effective Date Possibility for IASB to move quicker than FASB 25

27 FASB Insurance Contracts Premium Allocation Approach (PAA) Most P&C and short-term health insurance contracts Some fixed-fee service and guarantee contracts Applied if coverage period is 1 year or less or other criteria met Building Block Approach (BBA) Most Life, annuity and long-term health and some investment contracts Applied to all other contracts (i.e. coverage period over 1 year) 26

28 PAA Model Similar to today s unearned premium model Criteria for use: Coverage period of 1 year or less or At inception, it is unlikely that there will be significant variability during the period before claims are incurred, in the expected value of net cash flows required to fulfill the contract We expect most captives and RRGs to follow PAA Model 27

29 PAA Model Pre-Claim Obligation Recognize revenue over the coverage period Coverage period = Expected timing of incurred claims Pre-claim Obligation (FKA Unearned Premium) = Remaining contractual premium for unexpired portion of contract, less Deferred acquisition costs Onerous contract liability (FKA Premium Deficiency Reserve) 28

30 PAA Model Post-Claim Obligation Post-claim Obligation - Discounted loss reserves Unbiased, probability-weighted estimate of expected fulfillment cash flows, to recognize the statistical mean of possible scenarios Must incorporate all relevant information Move away from best estimate 29

31 PAA Model Discounting Liability discounted to present value using rate that Reflects the characteristics of the liability, Is consistent with observable market inputs, Excludes any factors in observed rates not in the liability and Reflects only risks and uncertainties not reflected elsewhere May elect not to discount if it would be immaterial 30

32 PAA Model Discounting ED suggests 2 approaches to select discount rate: 1. Portfolio Yield Approach - Begins with the expected yield on assets backing the liability, adjusted for expected and unexpected defaults 2. Risk Free Approach Begins with risk free rate for similar term and adjusts for items such as illiquidity premium and other market factors ED does not mandate or prescribe either method 31

33 PAA Model Recording Discount Interest expense recorded to reflect accretion on the insurance balance based on discount rate at inception of contract Recorded as a component of net investment income Changes estimate due to change in discount rate recognized in other comprehensive income Reinsurance - Under the PAA is similar to current model but would record ceded premium net of related ceding commissions 32

34 FASB Insurance Contracts Building Block Approach (BBA) Significant change for other insurance companies to a fulfillment model PV future net cash flows that the entity expects in fulfilling the contract Margin representing profit at risk recognized as income as the uncertainty in the cash flows decreases (i.e. over claim payout period) Significant differences with FASB & IASB Single margin vs. risk adjustment Acquisition costs successful vs. unsuccessful 33

35 FASB Measurement Model Features 34

36 Other Items of Interest 35

37 Principle-Based Reserves & SPV s NAIC created some controversy at its fall 2012 meeting over two topics both related to Life Insurers Major change in terms of how reserves will be determined Principles-based reserves will replace current formulaic reserve computation method Intended to provided some relief from current requirement to carry XXX reserves which are through to be redundant and in excess of reserves actuaries believe are necessary Use of captive life insurers (special purpose vehicles) as means of financing reserves White paper issued by NAIC interpreted as critical of use of SPV s Used to avoid statutory accounting rules or designed to solve problems created by statutory accounting rules? 36

38 COSO Framework First published in 1992 Gained wide acceptance following financial control failures of early 2000 s Most widely used framework in the US Also widely used around the world Resource: Charts and Graphics on next 5 slides taken directly from May 2012 COSO Presentation 37

39 Plan for Update to COSO Framework 38

40 COSO Framework: What s Changing 39

41 COSO Framework: Update Summary 40

42 Questions? Josh Partlow, CPA Partner, Johnson Lambert LLP (802) Patti Pallito Deputy Managing Director, Aon Insurance Managers (USA), Inc. (802)

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