Statutory and US GAAP Update

Transcription

1 Statutory and US GAAP Update Georgia IASA Meeting October 30, 2014 Presented by: Brian Kilbane

2 Agenda Statutory Update New SSAPs for 2014 Substantive Changes for 2014 Select Non-Substantive Changes for 2014 Other NAIC News Substantive Blanks Changes U.S. GAAP Update Update on Insurance Contracts and Investments Standards Accounting Standard Updates 2

3 Statutory Update New SSAP s for 2014 SSAP 106: Fees Payable to the Federal Government by Health Insurers SSAP No. 104R, Share-Based Payments SSAP No. 105, Working Capital Finance Investments 3

4 New SSAP, Fees Payable to the Federal Government by Health Insurers Addresses accounting for Section 9010 assessment fees associated with the Patient Protection and Affordable Care Act (ACA). Effective January 1, 2014 Calculated based on the ratio of the amount of an entities net premiums written during the preceding calendar year to the amount of health insurance written during the preceding calendar year (data year). Payable on September 30; Effective 2014 (fee year) Estimated and recorded as liability in 2014, with offset to nonadmitted deferred cost asset Amortized to expense over the straight line method on a monthly basis 4

5 New SSAP, Fees Payable to the Federal Government by Health Insurers Starting at December 31, 2014, allocate special surplus for the estimated 2015 liability, reverses January 1, 2015, when liability is established Let s assume a company s assessment fee is calculated to be $100,000 per month and the company s year-end is December 31. Therefore, the fee to be paid in 2015 would be $1.2 million. As of December 31, 2014, the company would allocate unassigned surplus to special surplus for $1.2 million as illustrated below: December 31, 2014 Prior to ACA Fee After ACA Fee Unassigned Surplus $10,000,000 $8,800,000 Special Surplus 0 1,200,000 Total Surplus $10,000,000 $10,000,000 5

6 New SSAP, Fees Payable to the Federal Government by Health Insurers On January 1, 2015, the company would reverse the special surplus so that unassigned surplus goes back to $10 million. Also, the company would record the following entry to record the liability: Debit Deferred Cost Non-admitted $1,200,000 Credit Accrued Expenses $1,200,000 During 2015, the deferred cost is amortized on a monthly basis: Debit Taxes, Licenses and Fees $100,000 Credit Deferred Cost Non-admitted $100,000 On September 30, 2015, the assessment fee is paid to the U.S. Treasury: Debit Accrued Expenses $1,200,000 Credit Cash $1,200,000 6

7 SSAP No. 104R, Share-Based Payments Overview Adopts, with modification, GAAP guidance regarding the exchange of equity instruments for goods or services with non-employees as reflected in Subtopic Equity, Equity-Payments to Non-Employees. Effective December 31, 2014 Recognize the goods acquired or services received as part of the transaction when it obtains the goods or as services are received. If share-payment is made before goods or services are rendered, record a prepaid non-admitted asset. Measured at fair value of the consideration received, or the fair value of the equity instruments issued, whichever is a more reliable measure 7

8 SSAP No. 104R, Share-Based Payments Overview Measured at the earlier of: The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment) The date at which the counterparty s performance is complete 8

9 SSAP No. 105, Working Capital Finance Investments Overview Allows working capital finance investments that meet specific criteria to be admitted assets Effective January 1, 2014 A working capital finance program is an open account program under which an investor may purchase interests, or evidence thereof, in commercial non-insurance receivables. A working capital finance program is created for the benefit of a commercial investment-grade obligor and its suppliers of goods or services, and facilitated by a finance agent 9

10 SSAP No. 105, Working Capital Finance Overview Investments A working capital finance program transfers a right to payment to an investor from a short term obligation and arises from transactions among: a buyer of goods or services that becomes an obligor to the supplier of goods or services, the supplier(s) of those goods or services, a finance agent, and an investor A working capital finance investment is an interest in payment(s) from a confirmed supplier receivable issued pursuant to a working capital finance program The payment (maturity) date must not exceed one year from the date of invoice from the supplier to the obligor 10

11 SSAP No. 105, Working Capital Finance Investments Overview If the credit rating of the working capital finance program or obligor falls to non-investment grade (below the equivalent of NAIC designation 1 or 2 ), the reporting entity shall nonadmit, the working capital finance investments obtained under the related working capital finance program and/or the related obligor. Reported at amortized cost. Due to the short-term nature of these investments, once an investment is nonadmitted due to the credit rating of the working capital finance program or the obligor, those investments will continue to be nonadmitted. Included in IMR and AVR for life companies. 11

12 Select Non-Substantive Revisions for 2014 Ref No SSAP Form A Title Description SSAP No. 62R SSAP No SSAP Nos. 40 and 90 SSAP Nos. 30 and 32 Impact of Transfer on Provision for Reinsurance Hedge Accounting Requirement Move Guidance From SSAP No. 90 And Into SSAP No. 40 Adding a preferred stock class of Exchange Traded Funds Revisions, effective 2014, change the Schedule F reporting and the provision for reinsurance calculation for certain asbestos and environmental retroactive reinsurance contracts. Date Finalized 8/24/2013 Consistency accounting and reporting changes allow transactions that meet hedge effectiveness to follow fair 4/6/2013 value hedge accounting if elected by the reporting entity. Revisions move guidance related to the measurement and classification of real estate investments from SSAP No. 90 into SSAP No. 40, as well as to incorporate clarifying revisions. Revisions to SSAP No. 32 add a classification of exchange traded funds (ETFs) to preferred stocks. Revisions to SSAP No. 30 indicates ETFs are included in the definition of common stock unless they meet the qualifications for preferred stock treatment. 4/6/2013 4/6/

13 Select Non-Substantive Revisions for 2014 Ref No SSAP Form A Title Description SSAP No. 101 SSAP No. 26 SSAP No. 1 Inconsistency regarding tax planning strategies Mandatory Convertible Securities Accounting Disclosures for Restricted Assets Revisions clarify that consideration of tax-planning strategies is not required for the admission calculation, but if used for admittance, shall not conflict with the computation of the statutory valuation allowance if taxplanning strategies were utilized in the statutory valuation allowance determination Revisions add a definition of mandatory convertible securities and revise the accounting and reporting guidance to report these securities at the lower of amortized cost or fair value. Disclosure revisions to aggregate information reported in the Annual Statement Investment Schedules in accordance with the coding of investments that are not under the exclusive control of the reported entity, including assets loaned to others, and restricted asset information reported in the General Interrogatories. Date Finalized 4/6/2013 4/6/2013 5/15/

14 Select Non-Substantive Revisions for 2014 Ref No SSAP Form A Title Description SSAP No. 43R SSAP No. 68 SSAP No. 26 SSAP 43R Impairment Disclosure Clarification of SSAP No. 68 Business Combinations and Goodwill when Investees Subsequently Cease to Exist Make Whole Call Provisions & Continuously Callable Bonds Revisions include changing the footnote disclosure requirement in SSAP No. 43R to reporting impairments taken only in the current year, thereby reducing the data included in the Notes to Financial Statements. The adoption also moved agenda item : Schedule for SSAP No. 43R Disclosures to the disposed listing as a schedule would no longer be necessary. Revisions include clarification in SSAP No. 68 Business Combinations and Goodwill, that the elimination of goodwill when the investee ceases to exist applies to both statutory purchases and mergers. and clarifies that internally generated goodwill and goodwill to the reporting entity in itself are not permitted. Revisions clarify utilizing the "yield to worst" concept for make whole call provisions with an effective date of Jan. 1, Date Finalized 11/12/ /12/ /15/

15 Select Non-Substantive Revisions for 2014 Ref No SSAP Form A Title Description SSAP Nos. 1, 15, 30 and 52 Restricted Asset (E) Subgroup Referral FHLB Transactions SSAP No. Clarification of Appendix B Included in SSAP No SSAP No. 86 ASU : Inclusion of the Fed Funds Swap Rate as a Benchmark Interest Rate Revisions 1) improve the reporting of FHLB capital stock, 2) develop additional and enhanced disclosures for FHLB transactions, and 3) incorporate the current guidance for collateral requirements found in INT 01-31: Assets Pledged as Collateralinto SSAP No. 30. Revisions add reference in Appendix B Determining the Valuation Method, to the downstream holding company guidance included in paragraph 21 of SSAP No. 97. Revisions adopt ASU which define a benchmark interest rate and eliminate the prior restriction on using different benchmark rates for similar hedges. Date Finalized 10/4/2013 March 29, 2014* March 29, 2014* 15

16 Other NAIC News Captive Insurance The Principles-Based Reserving Implementation Task Force is responsible for addressing whether any additional regulation should be instituted for captive insurance companies. Primarily relates to insurer-owned life insurance captives with Regulation XXX and/or AXXX business. However, any decisions on captive regulation would likely impact all captives in some manner. State departments with significant life insurers domiciled in their states are for more regulation. State departments with significant captive industries are not in favor of more regulation. 16

17 Other NAIC News Captive Insurance On June 30, 2014, the PBR Task Force adopted the XXX/AXXX Framework. Applies to reinsurance ceded to captive insurers, special purpose vehicles, reinsurers that are not eligible to be ceded reinsurers, reinsurers that deviate from STAT/RBC rules, etc. The ceding insurer may only receive credit for reinsurance, if, but only if: The ceding insurer establishes gross reserves, in full, using applicable reserving guidance The ceding insurer satisfies the Primary Security Requirement (i.e., the ceding insurer receives as collateral Primary Security in at least the amount determined pursuant to the Actuarial Method). Portions of the statutory reserve exceeding the Primary Security Requirement may be collateralized by Other Security. At least one party to the financing transaction holds an appropriate RBC cushion. The reinsurance arrangement is approved by the ceding insurer s domestic regulator. 17

18 Other NAIC News Captive Insurance Definitions: Primary Security Requirement - The ceding insurer would need to receive as collateral (on a funds withheld, trust or modified co-insurance basis) Primary Security in at least the amount determined pursuant to the Actuarial Method. Primary Security Cash and SVO-listed securities meeting certain requirements. Considering whether to include clean, irrevocable, unconditional evergreen LOC s. Actuarial Method VM-20 (i.e. PBR), modified to incorporate changes to mortality tables developed by the AAA, and another modifications suggested by LATF Other Security Any other security to which the NAIC has developed an RBC asset charge RBC Cushion One party would be required to perform the full traditional NAIC methodology. 18

19 Other NAIC News Captive Insurance Other Requirements: XXX/AXXX Reinsurance Supplement in the Annual Statements will be developed New note disclosure will be required in the audited financial statements regarding compliance with the XXX/AXXX Reinsurance Framework. Timing and Next Steps: Technical groups will begin working on the technical aspects of the framework. New disclosure requirements would be effective 12/31/2014. Framework would be required for new business ceded to existing structures starting January 1, 2015 (tentative). New RBC rules would be in place for 12/31/

20 Other NAIC News PBR Implementation Update As of August 18, 2014, 18 states have enacted or awaiting gubernatorial signature (28% of earned premium) 12 states plan to introduce legislation in 2014/2015 (30 states/60%) In order to be effective, at least 42 states and 75% of total earned premium must enact PBR Task Force recommended an earliest possible operative date of January 1,

21 Other NAIC News Own Risk and Solvency Assessment Required for insurers with greater than $500 million of direct and assumed business. Requires documentation regarding how the insurance company addresses and mitigates risks and other corporate governance guidelines. Pilot project occurred during 2012 & 2013 headed up by Kansas and New York On January 30, 2014, feedback was provided to the ORSA Subgroup on the pilot project 21

22 Other NAIC News Select ORSA Feedback 1) Foundation of the ORSA Summary report could be developed from the reporting of ERM to the Board of Directors and could contain the same basic elements. 2) Provide multi-year view of financial data. 3) Mapping of legal entities to business units. 4) Details of actual risk limits to support the assertion that the Company has risk limits. 5) If risk limits, appetites and tolerances have changed, discuss the change. 6) Discuss risks prospectively. 7) Discuss risk mitigation. 8) Perform combined stress scenarios in addition to single stress scenarios 22

23 Select ORSA Feedback Other NAIC News 9) Provide an explanation of how capital models are calculated and discuss the group capital analysis performed by the insurer/group. 10) List of risk owners (i.e. department accountable for risk). 11) Flowchart of Risk Management and Control. 12) Explanation of how compensation and incentives are tied to risk management. 13) Inclusion of heat maps. 14) When using multiple capital models, create a graphical illustration to compare the different model results. 15) Provide more stress testing on liquidity, especially for life insurance business, rather than a single focus on capital. 16) Identify risks associated with intercompany dependencies 23

24 Other NAIC News Select ORSA Feedback 17) Include a discussion on information technology risk 18) Risking Ranking/Rating 19) Walk-through discussion with Regulator. 24

25 Other NAIC News Corporate Governance Working Group Adopted the: Corporate Governance Annual Disclosure Model Act and the Corporate Governance Annual Disclosure Model Regulation Purpose Provides the Insurance Commissioner with a summary of the insurer s corporate governance structure, policies and practices Outlines the requirements for completing the annual disclosure The annual disclosure will get confidential treatment Does not prescribe or impose corporate governance standards Required to be filed on June 1(Effective for 2016) Applies to all insurers Disclosures at the level the insurer determines its risk level (ultimate parent, intermediate holding company, individual legal entity) 25

26 Other NAIC News Corporate Governance Working Group Contents of the Annual Disclosure How oversight and management responsibilities are delegated between the Board, committees and senior management How the board is kept informed of strategic plans and related risks How reporting responsibilities are organized by each critical risk areas 26

27 Other NAIC News Private Equity Issues Working Group Purpose of the WG is to evaluate whether additional rules, disclosures, procedures, oversight are needed related to the increase in private-equity owned insurance companies. Concern is policyholder s could be at a disadvantage as regulator s fear private equity is more near sighted in managing its operations, where insurance companies should be manager over the long term. 27

28 Other NAIC News Private Equity Issues Working Group AM Best Survey presented August 17, 2014 No impact on insurance company s strategies Challenges Management teams tend not to have a long track record in insurance Proper Asset/Liability Management Higher Risk/Medium Risk assets Proper risk management Complex ownership structures 28

29 Other NAIC News Private Equity Issues Working Group AM Best Life and Health Benchmarking Private Equity Return on Equity 9.3% 6.5% AM Best Capital Adequacy Ratio 199 (A++) 245 (A++) C&S/Liabilities 6.9% 17.0% High Risk Assets/Total Capital 81% 9.3% Sch. BA/Invested Assets 3.2% 0.3% Net Investment Yield 5.5% 4.5% Industry 29

30 Adopted Blanks Revisions Ref # Description of Change or Revision Effective Date BWG Modify the supplemental compensation exhibit and add instructions to facilitate the collection of additional detail on the nature of compensation paid to top executives and directors. Annual BWG Change the column description for the Federal ID Number Column on Schedule Y, Part 1A and Part 2 to read only ID Number. Add instruction similar to the ID Number Column instruction included in the reinsurance exhibits Schedule F and Schedule S. Annual BWG Add questions related to the Actuarial Memorandum required by Actuarial Guideline XXXVIII 8D and Regulatory Asset Adequacy Issues Summary (RAAIS) required by the Actuarial Opinion and Memorandum Regulation (# 822), Section 7A(5) to the Supplemental Exhibits and Schedules Interrogatories. (Note: Property, Health and Title only included due to the form numbers table being a uniform table in the instructions). Annual BWG Move from Note 21, Other Items the disclosure for Offsetting and Netting of Assets and Liabilities to Note 5, Investments with an illustration to be data captured. Annual

31 Adopted Blanks Revisions Ref # Description of Change or Revision Effective Date BWG Add instructions and illustrations for new disclosure to Note 5, Investments for Working Capital Finance Investments(WCFI) as Note 5Iwithaneffectivedateoffirstquarter2014 Annual BWG Add contact address to the list of information to be included on the combined statement title page. Annual

32 U.S. GAAP Update Insurance Project Financial Instruments Accounting Standards Updates Other Current Projects 32

33 Insurance Project On February 19, 2014, the FASB decided to: Generally limit the scope of insurance accounting to insurance entities. Retain the existing recognition and measurement model for short-duration contracts under U.S. GAAP and make targeted improvements to enhance the disclosures for such contracts. Make targeted improvements to the recognition, measurement, and disclosure model for long-duration contracts. Based on feedback on the proposed guidance, the FASB found it easier to focus on targeted improvements versus establishing numerous exceptions. 33

34 Insurance Project Long Duration Contracts On August 27, 2014 the FASB Board decided the following: Assumptions Update assumptions during Q4, and include effects in net income. Provision for adverse deviation should not be included in the calculation of the liability. Disclosures: Disaggregate future policy benefits liability by time bands. Show weighted average discount rates for each time band and information on why discount rates changed. Disaggregated quantitative and qualitative information about the methods and inputs used to develop the future policy benefits liability and assumptions used (discount rate, mortality, morbidity, lapse, expense). Disaggregated reconciliations from opening and closing balance for future policy benefits liability. Separate disclosure of changes due to new contracts, benefit payments, changes in assumptions and derecognition. 34

35 Insurance Project Long Duration Contracts On August 27, 2014 the FASB Board decided the following: Premium Deficiency and Loss Recognition Premium deficiency test is not required since assumptions are updated annually. Next Steps Board to determine guidance on how to develop the discount rate used. No timetable for exposure draft. 35

36 Insurance Project Short Duration Contracts On August 13, 2014 the FASB Board decided the following: Incurred and Paid Claims Development Tables Tables should be disclosed in the financial statement footnotes. No further than 10 years, but should present information for number of years for which claims incurred typically remain outstanding. Health Insurance Claims Disclosure IBNR included in the liability for unpaid claims and claim adjustment expenses for health insurance claims, either as a separate disclosure or as a component of the rollforward of the liability for unpaid claims and claim adjustment expenses. Effective Date Public Annual reporting periods beginning after December 15, Interim periods within annual reporting periods beginning after December 15, 2015 Non-public one year later Early adoption permitted. Next Steps ASU to be drafted 36

37 Insurance Project Short Duration Contracts On July 16, 2014 the FASB Board decided the following: Qualitative Information about the Liability for Unpaid Claims and Claim Adjustment Expenses Disclose in annual financial statements information about material changes in judgments made in calculating the liability for unpaid claims and claim adjustment expenses, including the reasons for the changes and the effects on the financial statements. Health Insurance Claims Disclosures do not need to include the percentage payout of claims by accident year. Effective Date Public Annual reporting periods beginning after December 15, Interim periods within annual reporting periods beginning after December 15, 2015 Non-public one year later Early adoption permitted. Next Steps ASU to be drafted 37

38 February 2013 Exposure Draft Financial Asset Classification & Measurement Step 1 Are cash flows solely Principal and Interest? Yes * No bifurcation- entire instrument classified together Form of instrument not considered (e.g. loan vs. securities) No Step 2 Hold to collect cash flows ONLY? No Hold to collect cash flows AND sell assets Yes Yes No Hold to collect Amortized Cost* Trade receivables Loans held for investment Some debt securities Senior securitization tranches *No tainting Hold to collect & sell FV-OCI Debt securities Potentially some loans Other business models FV-NI Equity securities Certain debt securities Loans held for sale Convertible debt investments Residual securitization interest Certain hybrid assets Derivatives 38

39 Redeliberated Model- Financial Assets Retain current U.S. GAAP for classification and measurement of financial assets, except for equity securities Assessment of a valuation allowance for a deferred tax asset related to an AFS debt security should be made in combination with the entity s other deferred tax assets (for now!) Retain fair value option under Topic 825, Financial Instruments (previously FASB Statement No. 159) 39

40 Redeliberated Model- Equity Investments Trading category with FV-NI measurement All equity investments Except equity method investments and Those that qualify for the practicability exception Cost - impairment +/- observable price changes in orderly transactions for identical or similar investment of the same issuer Equity securities without a readily determinable fair value 40

41 February 2013 Exposure Draft Financial Asset Classification & Measurement Amortized cost Primary measurement attribute unless Fair value through net income Short sales, Nonrecourse, intend to subsequently transact at FV, and FVO option for hybrid liability Retains bifurcation of hybrid financial liabilities If fair value option is elected for a financial liability, changes due to own credit recognized in OCI For non-recourse debt that can only be settled with certain assets, measurement of debt follows measurement of assets 41

42 Redeliberated Model- Financial Liabilities Retains current U.S. GAAP, including bifurcation of hybrid instruments and fair value option Amortized cost Primary measurement attribute unless Fair value through net income Fair value option is elected If fair value option is elected for financial liability, changes due to own credit 1,2 recognized in OCI 1. An entity may consider the portion of total FV change that exceeds the amount of change in a base market rate (such as risk-free) or an entity may determine the effect of instrument-specific credit risk by using another, more representationally faithful method 2. An entity should continue to present in net income the changes in FV due to instrumentspecific credit risk for derivative liabilities 42

43 Impairment: Credit Losses Scope financial assets not measured at fair value through net income (i.e. amortized cost or fair value through OCI) Marketable debt securities Accounts receivable Lease receivables Loans and notes receivable Others 43

44 Impairment: Credit Losses Current Expected Credit Loss model Recognize allowance for all expected credit losses Estimate of all contractual cash flows not expected to be collected No threshold (i.e. no incurred loss threshold) Must reflect time value of money 44

45 Impairment: Overview of Post-ED Decisions To address misunderstandings and operational concerns related to the lifetime measurement objective, tentatively decided to clarify that: An entity is not expected to forecast and predict economic conditions over the entire life of the asset; rather, it is expected to: update historical loss experience for current conditions and reasonable and supportable forecasts about the future; and revert to a historical loss experience for the periods beyond those that are able to be reasonably and supportably forecasted 45

46 Impairment: Overview of Post-ED Decisions cont. Other notable tentative decisions made by the Board during redeliberations: FV-OCI Debt Instruments: If FV is greater than or equal to the financial asset s amortized cost basis, no credit losses are recognized If FV is less than the financial asset s amortized cost basis, expected credit losses are recognized under the CECL model but limited to the difference between fair value and amortized cost Fully or Over-collateralized Debt Instruments - An entity would not be required to recognize a loss on a financial asset in which the risk of nonpayment is greater than zero yet the amount of loss would be zero (for example, when a debt instrument is fully or over-collateralized) Nonaccrual - The final Accounting Standards Update will not provide guidance on when an entity ceases to accrue interest income 46

47 Impairment: What s Next? (As of July 2014) The current project plan calls for the Board to redeliberate the following topics: Potential changes to the measurement of expected credit losses Elimination of multiple outcomes Reversion to the mean Practical expedients Potential reconsideration of tentative decision on FV-OCI assets Scope Disclosures Transition and effective date 47

48 Private Company Council Standards FASB s Private Company Council (PCC) issued ASU s to simplify accounting for private companies to use alternative approaches to account for: Goodwill (ASU ) Private companies allowed to amortized goodwill on a straight line basis over 10 years, or less than 10 years if can demonstrate that shorter useful life is appropriate. Test of impairment when triggering event occurs. Effective prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill realized within annual periods beginning after December 15, Early adoption permitted. Certain types of interest rate swaps ( ) Allows simplified hedge accounting approach to account for swaps that are entered into for the purpose of economically converting a variable-rate borrowing into a fixedrate borrowing. Practical expedient to qualify for cash flow hedge accounting. The simplified hedge accounting approach will be effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015, with early adoption permitted. 48

49 Private Company Council Standards FASB s Private Company Council (PCC) issued ASU s to simplify accounting for private companies to use alternative approaches to account for: Consolidation (ASU ) Elect alternative to not apply VIE guidance to a lessor entity if: The private company lessee and the lessor entity are under common control The private company lessee has a lease arrangement with the lessor entity Substantially all of the activities between the private company lessee and the lessor entity are related to leasing activities between those two entities, and The private company lessee explicitly guarantees or provides collateral for any obligation of the lessor entity related to the asset leased by the private company. Effective retrospectively for annual periods beginning after 12/15/2014 and interim periods after 12/15/2015. Early adoption permitted. 49

50 VIE Guidance to Common Control Leasing Typical private company common control leasing arrangement: Owner 100% Interest 100% Interest Manufacturing Company Debt Pays Rent Leases Land & Building Leasing Company Mortgage Bank Bank

51 Identifiable Intangible Assets Business Combination Some question that the requirement for separate recognition & measurement of certain identifiable intangible assets from goodwill does not provide users with decision-useful information Cost & complexity: estimating fair value of certain assets, including some identifiable intangible assets, e.g. customer relationships 51 51

52 Identifiable Intangible Assets Principle - only recognize & measure assets capable of being sold or licensed independently Two assets that often do not meet this principle are: Non-compete agreements Customer-related intangibles Except for servicing rights, commodity supply contracts and core deposits 52

53 Next Steps Identifiable Intangible Assets PCC decided September 17 th on an alternative to not recognize non-compete agreements (NCAs) and customer-related intangibles (CRIs) Awaiting final FASB endorsement May issue in January 2015 Early adoption permitted 53 53

54 Private Company Council Standards Definition of a Public Entity (ASU ) An entity that is required by the SEC to file or furnish financial statements with the SEC or does file or furnish financial statements with the SEC, IS considered a public business entity. A consolidated subsidiary of a public company IS NOT considered a public business entity for the purpose of stand alone financial statements, other than those included in an SEC filing. A business entity that has securities that are not subject to contractual restrictions on transfer and that is required to prepare US GAAP financial statements and make them publicly available on a periodic basis IS considered a public business entity. 54

55 Revenue from Contracts with Customers (ASU ) An entity should 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. The standard provides a five-step process for recognizing revenue: 1. Identify the contract with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. 55

56 Revenue from Contracts with Customers (ASU ) Effective Dates Public Companies Annual and interim periods beginning after December 15, Early adoption NOT permitted. Nonpublic Companies Annual periods beginning after December 15, 2017 Interim periods beginning after December 15, 2018 Early adoption allowed, as long as not earlier than public company effective dates. 56

57 Revenue from Contracts with Customers (ASU ) More principles based with fewer rules greater judgment will be required. Insurance contracts are scoped out. 57

58 Other ASU s Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure(ASU ) A creditor should reclassify a collateralized mortgage loan (when creditor obtains one ore more collateral assets to satisfy all or part of a receivable) such that the loan should be derecognized and the collateral asset recognized when it determines that there has been in substance a repossession or foreclosure by the creditor, that is, the creditor receives physical possession of the debtor s assets regardless of whether formal foreclosure proceedings take place. In substance a repossession or foreclosure was not previously defined in GAAP Occurs upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures also required. Effective dates: Public annual and interim periods beginning after December 15, 2014 Non-Public Annual periods beginning after December 15, 2014 and interim periods beginning after December 15,

59 Other ASU s Development Stage Entities (ASU ) Development Stage Entity distinction has been removed from US GAAP, and those no longer permitted to follow these requirements. Effective Dates Various effective dates starting with annual periods beginning after December 15, 2014, depending on the type of amendments. Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (ASU ) Repurchase-to-maturity transactions to be accounted for as secured borrowings. Repurchase financing arrangements require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting. Additional disclosures required. Effective Dates Various effective dates starting with annual periods beginning after December 15, 2014, depending on the type of transfer. 59

60 Other ASU s 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 ) A performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The award should be accounted for as an award with performance conditions that affect vesting. Performance target is not reflected in estimating the grant date fair value of the award. Compensation cost should be recognized in the period in which it becomes probably that the performance target will be achieved. Effective Dates Annual and interim periods beginning after December 15, Earlier adoption is permitted. 60

61 Other ASU s Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (ASU ) Entities that consolidate a collateralized financing entity may elect to measure the financial assets and the financial liabilities of that collateralized financing entity using ASC 820, with changes in fair value reflected in earnings or an alternative method provided for in the ASU. Effective dates: Public annual and interim periods beginning after December 15, 2015 Non-Public Annual periods ending after December 15, 2016 and interim periods beginning after December 15,

62 Other ASU s Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (ASU ) A mortgage loan should be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1. The loan has a government guarantee that is not separable from the loan before foreclosure. 2. At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim. 3. At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. Effective dates: Public annual and interim periods beginning after December 15, 2014 Non-Public Annual periods ending after December 15, 2015 and interim periods beginning after December 15,

63 Other ASU s Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern (ASU ) Management should evaluate whether there are conditions or events that raise substantial doubt about an entity s ability to continue as a going concern within one year of the date of the issuance of the financial statements. Evaluation based on relevant conditions/events that are known and reasonably knowable at the date of the issuance of the financial statements. If management identifies conditions or events that raise substantial doubt an entity s ability to continue as a going concern, management should consider whether it plans to mitigate those conditions/events will alleviate the substantial doubt. Mitigating plans should only be considered when: It is probable that the plans will be effectively implemented, and, if so, It is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity s ability to continue as a going concern. 63

64 Other ASU s Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern (ASU ) If substantial doubt is alleviated, management should disclose the following: a. Principal conditions or events that raised substantial doubt about the entity s ability to continue as a going concern (before consideration of management s plans) b. Management s evaluation of the significance of those conditions or events in relation to the entity s ability to meet its obligations c. Management s plans that alleviated substantial doubt about the entity s ability to continue as a going concern. 64

65 Other ASU s Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern (ASU ) If substantial doubt is not alleviated, management should disclose the following: a.statement in the footnotes indicating that there is substantial doubt about the entity s ability to continue as a going concern within one year of the date of the issuance of the financial statements. b.principal conditions or events that raise substantial doubt about the entity s ability to continue as a going concern c.management s evaluation of the significance of those conditions or events in relation to the entity s ability to meet its obligations c. Management s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity s ability to continue as a going concern. Effective Date Annual periods ending after December 15, Early adoption is permitted. 65

66 Questions? Brian Kilbane, Senior Manager Dixon Hughes Goodman LLP Insurance Services Group 225 Peachtree Street NE, Suite 600 Atlanta, GA