Year End GAAP Update. Erin Murphy Ernst & Young

Transcription

1 Year End GAAP Update Erin Murphy Ernst & Young

2 Agenda Insurance contracts Overview Short-duration insurance contracts Long-duration insurance contracts Revenue recognition Summary Implications for insurers Accounting for the Affordable Care Act Page 2

3 Agenda (continued) Other finalized GAAP guidance SEC broker-dealer reporting rules Investment companies Discontinued operations Definition of a public business entity Going concern Liquidation basis of accounting Other FASB Updates Classification and measurement Impairment Leases Consolidation Page 3

4 Insurance contracts overview Page 4

5 Insurance contracts Overview June 2013 FASB and IASB issue exposure drafts FASB re-deliberates plan in February 2014 and decides to focus on targeted improvements Out of scope Contracts written by non-insurance entities IASB continues deliberations; plans to issue final standard in 2015 Short-duration disclosures Deliberations end August 2014 Long-duration measurement Deliberations begin August 2014 Page 5

6 Short-duration insurance contracts Page 6

7 Short-duration insurance contracts Objectives Targeted improvements to the disclosures for short-duration contracts 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 Page 7

8 Short-duration insurance contracts Incurred and paid claims development tables - disaggregated Worker's Compensation in thousands Net Incurred Claims and Claim Adjustment Expenses Accident For the Years Ended December 31, Year 20X6 20X7 20X8 20X9 20X0 20Y1 20Y2 20Y3 20Y4 20Y5 20X6 $45,545 $45,750 $45,500 $46,250 $45,000 $45,750 $45,500 $46,250 $ 45,000 $ 45,750 20X7 50,250 50,050 49,850 49,650 49,450 49,250 49,050 49,900 48,850 20X8 55,500 56,400 53,700 52,800 51,900 51,000 50,100 49,950 20X9 55,750 54,810 53,870 52,930 54,455 55,685 55,535 20X0 56,000 55,060 54,120 53,180 52,240 52,150 20Y1 56,250 55,250 54,750 53,800 55,475 20Y2 56,500 55,800 55,100 54,350 20Y3 57,700 56,100 57,955 20Y4 58,825 59,005 20Y5 59,025 Total $ 476,750 $ 538,045 Page 8

9 Short-duration insurance contracts Incurred and paid claims development tables - disaggregated (continued) in thousands Net Cumulative Paid Claims and Claim Adjustment Expenses Accident For the Years Ended December 31, Year 20X6 20X7 20X8 20X9 20X0 20Y1 20Y2 20Y3 20Y4 20Y5 20X6 $12,455 $20,600 $25,590 $28,790 $30,990 $32,500 $34,750 $36,000 $ 38,000 $ 38,250 20X7 14,235 23,900 28,500 31,700 33,900 35,100 36,300 38,250 38,500 20X8 15,115 25,005 29,605 33,005 35,205 36,605 37,750 38,750 20X9 15,925 22,100 25,890 28,980 31,180 32,270 33,995 20X0 15,250 24,995 29,755 33,015 35,215 38,295 20Y1 16,400 23,200 28,100 32,600 33,700 20Y2 16,450 23,445 27,995 30,925 20Y3 16,550 24,565 28,975 20Y4 17,720 29,000 20Y5 19,580 Total $ 284,365 $ 329,970 All net outstanding liabilities prior to 20X6 19,905 24,425 Total net outstanding liabilities $ 212,290 $ 232,500 Page 9

10 Short-duration insurance contracts Reconciliation of the claims development tables December 31, 20Y5 20Y4 in thousands Net outstanding liabilities Worker's compensation $ 232,500 $ 212,290 Other insurance lines 70,955 64,255 Total net outstanding liabilities 303, ,545 Reinsurance ceded Worker's compensation $ 50,340 $ 48,755 Other insurance lines 9,970 8,925 Total reinsurance ceded 60,310 57,680 Impact of discounting - - Total gross liability for unpaid claims and claim adjustment $ 363,765 $ 334,225 Page 10

11 Short-duration insurance contracts Frequency and severity of claims As of December 31, 20Y5 Accident Year Net Incurred Claims and Claim Adjustment Expenses (In thousands) Incurred but Not Reported Liabilities (In thousands ) Reported Claims 20X6 $ 45,750 $ 25 1,322 20X7 48, ,255 20X8 49, ,378 20X9 55,535 1,385 1,423 20X0 52,150 3,755 1,386 20Y1 55,475 4,625 1,593 20Y2 54,350 6,200 1,400 20Y3 57, ,442 20Y4 59,005 14,920 1,567 20Y5 59,025 21,265 1,532 Page 11

12 Short-duration insurance contracts Average annual percentage payout of claims in year Average Annual Percentage Payout of Claims in Year: Worker's Compensation 29.6% 16.1% 8.8% 6.5% 4.0% 3.3% 3.2% 2.9% 2.4% 0.5% Page 12

13 Short-duration insurance contracts Rollforward of unpaid claims and claim adjustment expenses Required in interim and annual financial statements December 31, 20Y5 20Y4 in thousands Beginning of year balance, gross $ 334,225 $ 321,955 Reinsurance and other recoverables 57,680 55,425 Beginning of year balance, net $ 273,915 $ 264,275 Add provision for unpaid losses and LAE Current year $ 65,850 $ 62,200 Prior years 17,230 1,195 Total provision for unpaid losses and LAE 83,080 63,395 Less payments Current year $ 22,540 $ 20,345 Prior years 31,000 30,780 Total payments 53,540 51,125 End of year balance, net $ 303,455 $ 276,545 Reinsurance and other recoverables 60,310 57,680 End of year balance, gross $ 363,765 $ 334,225 Page 13

14 Short-duration insurance contracts Other 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 14

15 Short-duration insurance contracts Health 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 15

16 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 Example categories (any or all of the following) 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) Page 16

17 Short-duration insurance contracts Transition and effective date Transition Information about claims development that occurred earlier than five years before the end of the first financial year in which this guidance applies is not required Effective date For public business entities, annual reporting periods beginning after December 15, 2014 and interim reporting periods within annual reporting periods beginning after December 15, 2015 One year deferral for all other entities Early adoption permitted Page 17

18 Short-duration insurance contracts Path forward Path forward FASB proceeds towards a final Accounting Standards Update after an extended fatal flaw process Companies should consider their processes and procedures to apply new disclosure requirements Regulators to determine implications to auditor independence Page 18

19 Long-duration insurance contracts Page 19

20 Long-duration insurance contracts Objectives Targeted improvements to the accounting for long-duration insurance contracts 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 Page 20

21 Long-duration insurance contracts Tentative 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 21

22 Long-duration insurance contracts Tentative decisions to date (continued) Additional disclosures would be provided about the liability for future policy benefits: Page 22 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

23 Long-duration insurance contracts Other topics to be discussed Liability for future policy benefits The discount rate(s) that should be used for reflecting the time-value of money in measuring the liability for future policy benefits Whether the unit of account used to calculate the liability for future policy benefits should be prescribed Accounting for certain options and guarantees (for example, guaranteed minimum death benefits and guaranteed minimum income benefits) The expenses that are included in the measurement of the liability for future policy benefits Revenue recognition Whether insurance entities should disclose the portion of premiums recognized as revenue that are required to be returned to policyholders or their beneficiaries regardless of whether an insured event occurs (estimated returnable amounts such as cash surrender value) Page 23

24 Long-duration insurance contracts Other topics to be discussed (continued) Deferred acquisition costs (DAC) Whether the unit of account used to capitalize and amortize DAC should be clarified How DAC should be amortized If DAC should be amortized using estimated gross profits / margin, whether adjustments to DAC should be retrospective or prospective If retrospective unlocking is required, whether reporting entities should disclose information about the determination and future effects of retrospective unlocking Whether reporting entities should disclose a DAC rollforward Whether insurance entities should provide additional disclosures about insurance assets and liabilities Page 24

25 Revenue recognition Page 25

26 Revenue recognition (ASU ) Overview FASB and IASB issued a new global revenue recognition standard on 28 May 2014 Standard replaces existing US GAAP and IFRS guidance on revenue recognition Virtually every industry is affected Standard requires entities to use more judgment and make more estimates than under current guidance Its effect on financial statements, business processes and internal controls will likely be significant for some entities FASB/IASB transition resource group and other implementation resource groups (e.g., AICPA Task Forces) have been created Page 26

27 Revenue recognition Effective date Effective for annual periods beginning after 15 December 2016 (1 January 2017 for calendar year-end public entities and IFRS preparers) Optional one-year deferral for non-public entities under US GAAP Early adoption prohibited for US GAAP public entities, but nonpublic entities are permitted to adopt up to the public entity effective date Early adoption permitted for IFRS preparers Standard includes an expanded definition of a public entity Certain not-for-profit entities and employee benefit plans must follow public entity requirements Page 27

28 Revenue recognition Transition methods Full retrospective Cumulative catch-up adjustment at 1/1/2015 Financial statements New GAAP New GAAP New GAAP Footnotes ASC 250 disclosures Modified retrospective Cumulative catch-up adjustment at 1/1/2017 Financial statements Legacy GAAP Legacy GAAP New GAAP Footnotes Legacy GAAP Page 28

29 Revenue recognition Scope and exceptions What is in scope or affected Contracts with customers Sale of some nonfinancial assets that are not an output of the company s ordinary activities (e.g., property, plant and equipment, intangibles) What is not in scope Leasing contracts Insurance contracts Financial instruments contracts Certain nonmonetary exchanges Certain put options on sale and repurchase agreements Guarantees within the scope of ASC 460 Page 29

30 Revenue recognition Summary of the 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 Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) each performance obligation is satisfied Page 30

31 Revenue recognition Implementation 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 31

32 Revenue recognition What can you do now? Understand the magnitude of the changes to your entity from both a financial statement and business perspective Page 32 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

33 Accounting for the Affordable Care Act Page 33

34 Accounting for the Affordable Care Act Annual provider fee assessment US GAAP accounting pursuant to ASU Liability recorded in full once the reporting entity provides qualifying health insurance in the fee year (typically January 1) Data year no amount required to be recognized Fee year estimate and accrue the full amount of the liability when trigger event happens with an offset to deferred cost that is subsequently amortized to expense over the fee year Annual fee is to be presented as an operating expense Assessment does not represent a cost related to the acquisition of policies that is consistent with the definition of an acquisition cost in ASC Page 34

35 Accounting for the Affordable Care Act Risk sharing provisions Three programs with risk-sharing provisions under the ACA became effective in 2014: Risk adjustment permanent program Reinsurance temporary program for years 2014 to 2016 Risk corridor temporary program for years 2014 to 2016 Page 35

36 Accounting for the Affordable Care Act Risk sharing provisions (continued) ASC 944 reinsurance guidance is applicable to the reinsurance of the ACA US GAAP guidance does not specifically address the other ACA risk-sharing arrangements; possible US GAAP guidance includes: Experience-rated premiums (ASC ) If the ultimate premium cannot be reasonably estimated, the cost recovery method or the deposit method may be used until the ultimate premium becomes reasonably estimable Retrospective-rated premiums (ASC ) Insurance assessments (ASC ) Considerations in determining the appropriate guidance: Determination of unit of account Eligible versus non-eligible plans Components of the reinsurance program Page 36

37 Other Finalized GAAP Guidance Page 37

38 SEC broker-dealer reporting rules Overview SEC guidance issued in June 2013 Effective 31 December 2013 All broker-dealers required to file new unaudited form (Form Custody) quarterly Effective 1 June 2014 All broker-dealers required to file annually either: Compliance report (annual report on compliance and internal control over compliance) Exemption report Financial statements will be audited under PCAOB standards Supplemental report on internal control will no longer be required Page 38

39 Investment companies (ASU ) Overview The FASB issued a final standard in June 2013 that redefines an investment company (IC) The IASB issued final Investment Entities amendments in the fourth quarter of 2012 Some differences between US GAAP and IFRS remain Effective for interim and annual reporting periods in fiscal years that begin after 15 December 2013 Accounting and disclosures: A parent entity retains the specialized accounting used by an IC subsidiary in its consolidated financials New disclosures are required Page 39

40 Investment companies Assessment of investment company status An IC must either be regulated by the SEC under the Investment Company Act of 1940 or have all of the following fundamental characteristics: Obtains funds from one or more investors and provides them with investment management services Commits to investor(s) that its business purpose and only substantive activities are investing the funds solely for returns from capital appreciation, investment income or both The entity or its affiliates do not obtain or have the objective of obtaining returns or benefits from an investee or its affiliates that are not normally attributable to ownership interests or that are other than capital appreciation or investment income An entity would consider other typical characteristics of an investment company (e.g., multiple investments, multiple investors, fair value management of investments) Page 40

41 Discontinued operations (ASU ) Changes the criteria for reporting discontinued operations Raises the threshold for reporting discontinued operations Eliminates the prohibition on significant continuing involvement and cash flows Eliminates most scope exceptions Requires reclassification of prior period balance sheet and retains the presentation requirements on the face of the income statement Requires additional disclosures Effective for annual periods beginning on or after 15 December 2014 Apply prospectively for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements; early adoption permitted Page 41

42 Definition of a public business entity (ASU ) Overview FASB issued new definition of public business entity (PBE) Determines which companies can use: Private company alternatives under US GAAP Other private company relief (e.g., disclosure, transition, effective date differences) provided by the FASB in new standards An entity other than a PBE, a not-for-profit entity, or an employee benefit plan is a private company * FASB is using the term prospectively Does not change whether an entity is considered public or nonpublic for previously existing US GAAP requirements Used in ASU , Revenue from Contracts with Customers * As defined in ASUs , and Page 42

43 Definition of a public business entity Practical considerations Broader than other definitions of public entity Many companies traditionally thought of as private companies will be considered PBEs under the new definition and therefore ineligible for private company relief in new standards Includes companies whose financial statements are included in the SEC filings of others Complex Determining whether an entity is a PBE may be complex No transition guidance Companies should consider whether they might become PBEs before electing PCC alternatives Companies that become PBEs would have to undo the effect of PCC alternatives and recast their financial statements This may be challenging, costly and cause delays Page 43

44 Going concern (ASU ) Background Requires management to evaluate whether there are conditions or events that raise substantial doubt about an entity s ability to continue as a going concern and to provide disclosures when certain criteria are met Management is required to evaluate the following, in the aggregate, to determine whether substantial doubt over an entity s ability to continue as a going concern exists: Adverse conditions and events Certain management plans Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued) Evaluation would be required for annual and interim reporting periods Page 44

45 Going concern Disclosures If substantial doubt exists, include a statement to that effect and disclosures that enable financial statement users to understand: Principal conditions or events that raise substantial doubt Management s evaluation of the significance of those conditions or events Management s plans intended to mitigate conditions or events that raise substantial doubt If substantial doubt does not exist because of the impact of management s plans, include disclosures that enable financial statement users to understand: Principal conditions or events that raise substantial doubt Management s evaluation of the significance of those conditions or events Management s plans that alleviate substantial doubt Page 45

46 Liquidation basis of accounting (ASU ) Liquidation accounting is required when liquidation is imminent, unless an entity is outside the scope or is following a plan established at its inception Liquidation is imminent when the likelihood of the entity returning from liquidation is remote AND either of the following occurs: The parties with authority to approve a liquidation plan do so, and the likelihood of the plan being blocked is remote Other forces (e.g., involuntary bankruptcy) impose a plan for liquidation Effective for annual periods beginning after 15 December 2013 and interim periods therein Page 46

47 Other FASB Developments Page 47

48 Classification and measurement Background FASB issued a financial instruments ED in May 2010 Covered classification and measurement, credit impairment and hedging Proposed that most financial instruments would be measured at fair value Feedback indicated fair value wasn t appropriate for instruments that entities hold for collection (or payment) of contractual cash flows Page 48 FASB issued a revised ED on classification and measurement in February 2013 FASB and IASB jointly deliberated selected aspects of their classification and measurement models FASB s proposal and IASB s amendments to IFRS 9 would require entities to classify and measure their financial assets by applying a cash flow characteristics test and a business model test Redeliberations FASB decided not to pursue the model proposed in February 2013 and instead make only targeted amendments to existing US GAAP

49 Classification and measurement Proposed changes to existing US GAAP Equity investments: Equity investments (not accounted for under the equity method) would be measured at FV-NI Practicability exception for equity investments without readily determinable fair values Measurement would be at cost less impairment, adjusted for observable price changes for an identical or similar investment of the same issuer Qualitative impairment assessment for equity method investments and equity investments without a readily determinable fair value (i.e., one step impairment model) Impairment occurs if it is more likely than not that the fair value of the investment is less than its carrying value Page 49

50 Classification and measurement Proposed changes to existing US GAAP (cont.) Changes in instrument-specific credit risk for financial liabilities that are measured under the fair value option (FVO) would be recognized in OCI Valuation allowances on deferred tax assets related to debt securities classified and measured at FV-OCI would be evaluated in combination with an entity s other deferred tax assets 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 Exception to measure the fair value of loans receivable for disclosure purposes on an entry price notion would be eliminated Page 50

51 Classification and measurement Existing US GAAP would be retained Guidance for bifurcating embedded derivatives from hybrid financial instruments Classification and measurement models for loans and debt securities Guidance for financial liabilities not measured under the FVO Unconditional fair value option Classification and measurement of lender loan commitments Accounting for unrealized foreign currency gains and losses on available-for-sale debt securities Balance sheet presentation Page 51

52 Classification and measurement Path forward Significant matters to be discussed at future meetings include: Application of the one-step impairment model to equity method investments and equity investments lacking readily determinable fair values Transition and effective date Final standard expected in 2015 Page 52

53 Impairment Background The impairment project aims to address two primary weaknesses in existing US GAAP Delayed recognition of losses associated with loans and other financial instruments Complexity of multiple impairment approaches Impairment models previously considered by the FASB include: Lifetime losses built into effective interest rate Good book and bad book Three-bucket expected loss model FASB proposed a current expected credit loss (CECL) model in December 2012 IASB issued a final impairment standard (IFRS 9) with a variation of the three-bucket expected credit loss model in July 2014 Redeliberations FASB is currently refining the CECL model based on feedback received Page 53

54 Impairment Scope Page 54 Entities would apply the CECL model to financial assets that are classified and measured at amortized cost, including: Loans held for investment Held-to-maturity debt securities Receivables (trade, reinsurance, lease receivables recognized by lessors) A lender s loan commitments Today s other-than-temporary impairment (OTTI) model would continue to be applied to available-for-sale (AFS) debt securities with some modifications: An allowance would be used to recognize the credit portion of an OTTI, so an entity would recognize reversals of those losses immediately upon improvement in credit quality When assessing OTTI, an entity would no longer consider: The length of time that the fair value of the AFS debt security has been less than its amortized cost basis Recoveries or additional declines in the fair value of the AFS debt security after the balance sheet date

55 Impairment Core principles of the CECL model An estimate of contractual cash flows that are not expected to be collected would consider the following: The full contractual term of the financial asset, adjusted for expected prepayments Expected extensions, renewals and modifications would not be considered unless the entity reasonably expects to execute a troubled debt restructuring with the borrower Available information relevant to the collectability of contractual cash flows Information about past events (e.g., historical loss statistics), current conditions, and reasonable and supportable forecasts For periods beyond which the entity is able to obtain reasonable and supportable forecasts, the entity would revert to its historical credit loss experience Qualitative and quantitative factors specific to the borrower and the environment in which the entity operates An entity would not be able to ignore external credit ratings and credit loss information for financial assets of a similar credit quality Page 55

56 Impairment Path forward Significant matters to be discussed at future meetings: Whether to apply the CECL model to receivables, including trade, lease and reinsurance Application guidance for revolving lines of credit (e.g., credit cards) Disclosures Transition and effective date The Board could reach final decisions by the end of 2014 Final standard expected in 2015 Page 56

57 Leases joint project Redeliberations overview Q Exposure draft (ED) Redeliberations and 2nd ED Q Begin redeliberations Q3 2015? Final standard 2014 redeliberations are focused on: Definition and scope Lease classification Lessee accounting Lessor accounting Measurement Disclosure Effective date A final standard is not likely before Q Some fundamental differences between the FASB and the IASB have developed in redeliberations Page 57

58 Leases joint project Redeliberations definition Definition of a lease No final decision, but the Boards appear to support retaining the 2013 ED s key principles An arrangement is a lease if it: Depends on use of identified asset Conveys right to control the use of identified asset for a period of time Not clear whether, or when, Boards will revisit The definition of a lease will determine whether a contract is accounted for under the leases standard or the new revenue recognition standard Page 58

59 Leases joint project Redeliberations lessee accounting models Boards remain committed to putting most leases on balance sheet Recognition and measurement exemptions Short-term leases Leases of small assets (IASB only) Lease classification FASB dual lease classification Type A similar to today s capital leases Type B similar to today s operating leases Classification would be based on existing IFRS classification principles Similar to current US GAAP but no bright-lines IASB recognized leases would be classified as Type A Additional exception for leases of small assets The Boards decisions could result in different accounting for similar transactions Page 59

60 Leases joint project Redeliberations lessor accounting model Boards decided to limit changes to today s lessor accounting Leases would be classified using today s IFRS principles Based on transfer of risks and rewards Similar to US GAAP but no bright-lines or lessor-specific criteria Type A similar to today s sales-type or direct finance leases Recognize net investment, derecognize underlying asset Type B similar to today s operating leases Boards differ on when to recognize up-front profit for certain Type A leases (i.e., those similar to today s sales-type leases in US GAAP) FASB upon transfer of risks and rewards from lessee perspective IASB upon transfer of risks and rewards from lessor perspective The FASB wants to align profit recognition with revenue recognition principles; the IASB wants to limit changes to existing lessor accounting Page 60

61 Leases joint project Redeliberations other decisions and next steps Other decisions Lease term Index- and rate-based variable lease payments Discount rate Separating lease and non-lease components Lease modifications Subleases Sale and leaseback transactions Next steps continue redeliberations Lessee disclosures FASB private company issues IASB exemption for leases of small assets Transition and effective date A final standard likely would not be effective before 1 January 2018 Page 61

62 Consolidation Overview Redeliberations are finished but decisions differ from 2011 ED Final guidance will be issued after an extended staff draft period and fatal flaw review process Reexposure not deemed necessary Would rescind the FAS 167 deferral for certain investment funds Effective date Public business entities annual periods and interim periods within those annual periods beginning after 15 December 2015 Other entities annual periods beginning after 15 December 2016, and interim periods beginning after 15 December 2017 Early adoption would be permitted Page 62

63 Consolidation Tentative decisions Scope Excludes money market funds that comply with Rule 2a-7 of the Investment Company Act of 1940 and similar funds Requires additional disclosures by fund sponsors Amends criteria for determining whether fees paid to a decision maker represent a variable interest Amends criteria for determining whether a partnership (or similar entity) is a variable interest entity (VIE) focus on kick-out rights Primary beneficiary Benefits criterion excludes fees that are at market and commensurate with services provided Consider direct and indirect interests held through related parties Page 63

64 Consolidation Tentative decisions (cont.) When a single decision maker is an agent, a related party tie breaker test is not performed unless: The related parties are under common control and have the characteristics of a primary beneficiary Substantially all of the activities are conducted on behalf of a related party investor Voting model for partnerships (and similar entities)that general partner controls Evaluate control based on ownership of a majority of voting capital Page 64

65 Page 65 Questions?

66 Erin Murphy Bio Erin is a Senior Manager with Ernst & Young s Financial Services Office in Boston, MA. She has over fourteen years of experience in the financial services industry serving insurance. Her industry exposure includes life, property casualty, managed care, and reinsurance companies from mid-sized to large multi-national public insurance companies reporting IFRS, US GAAP, and NAIC bases of accounting. Erin s clients have included John Hancock, Wilton Reinsurance, Blue Cross Blue Shield of MA, FM Global, and Ability Reinsurance. Through her work on these audits, Erin has experience accounting for and auditing a variety of life, property casualty, and managed care insurance products. Erin also has a strong knowledge of investments and derivatives. She has assisted clients with their implementation and execution of a control-based audit approach under SOX 404 and the Model Audit Rule. Erin is a Member of the American Institute of Certified Public Accountants (AICPA) and the Massachusetts Society of Certified Public Accountants (MSCPA). She received a Bachelor of Business Administration degree in Accounting from James Madison University in Harrisonburg, Virginia. Page 66

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