STAT / GAAP Update. April 26, 2018

Transcription

1 STAT / GAAP Update April 26, 2018

2 Agenda STAT NAIC update Insurance statutory reporting GAAP ASU , Recognition and measurement of financial assets and financial liabilities Financial instruments Credit losses (ASU ) ASU : Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ASC topic 842 Leases (ASU ) Targeted improvements to the accounting for long-duration contracts 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

3 NAIC update April 23, 2018

4 NAIC Spring Meeting Highlights Adopted: - INT to provide a limited time, limited scope exception to not require the recognition of changes in reasonable estimates resulting from the Tax Cuts and Jobs Act (TCJA) after the issuance of statutory annual statements as Type I subsequent events in the audit financial statements KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

5 NAIC Spring Meeting Highlights (continued) Exposed: - Revisions to SSAP No. 101 to provide guidance for the effects of the TCJA. Comments were specifically requested on the assessment of the reversal patterns of deferred tax items resulting from the TCJA - Issue paper with a proposed treatment for certain derivative contracts related to variable annuity contracts that do not qualify to use the hedge accounting guidance in SSAP No A request for comments on the proposed response to the Valuation of Securities Task Force about the treatment of bank loans. The response suggests that borrowing base loans and debtor in possession (DIP) financing should be classified as collateral loans. - An issue paper detailing its initial assessment of how the recent targeted improvements to the US GAAP accounting model for derivatives could be applied to statutory accounting and the differences between US GAAP and statutory accounting that would be retained. - A discussion document on how the recently issued US GAAP guidance on credit losses could be considered for statutory accounting. - A revised memo on the treatment of senior debt and surplus notes and a memo on the scope of the group in the group capital calculation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

6 Income Taxes INT was adopted to provide a limited time and limited scope exception to not require the recognition of changes in reasonable estimates related to the TCJA after the issuance of statutory annual statements as Type I subsequent events in the audited financial statements. The interpretation also provided instructions for reporting changes in deferred taxes including: - recording the effects of change in tax law for all accounting estimates that are complete; - recognizing effects of accounting estimates that may be considered incomplete or for which reasonable estimates cannot be determined by applying guidance in SEC Staff Accounting Bulletin (SAB) 118, including relevant disclosures; - recording changes in estimates for circumstances when a reasonable 2017 estimate is updated or an estimate is established after the issuance of the 2017 financial statements, but before the issuance of the 2017 audited financial statements; - recording the change in deferred taxes resulting from the TCJA in: Net Unrealized Capital Gains (Losses) less Capital Gains Tax; Net Deferred Income Tax; Nonadmitted assets; and - clarifying that the footnote disclosures detailing deferred tax assets and liabilities for December 31, 2018 should be reported using the December 22, 2017 enacted tax rate, and prior year 2016 information should not be revised KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

7 Insurance statutory reporting April 23, 2018

8 Insurance statutory reporting Effective for 2017 reporting: - SSAP No. 2R reclassified money market mutual funds to cash equivalents and required them to be reported at fair value. - SSAP No. 26R removed Securities Valuation Office (SVO) designated bond Exchange Traded Funds (ETFs) from the definition of a bond and required the identification of instruments that will be measured using systematic value on January 1, SSAP No. 35R allowed expected renewals of short-term contracts for long-term care assessments to be considered in determining the premium tax credits and policy surcharge assets recognized when accruing guaranty and fund liability assessments. It also allowed the discounting of guaranty fund assessments from insolvencies of insurers that wrote long-term care contracts. - SSAP Nos. 55 and 65 added disclosures about significant changes in the methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses. Disclosures from ASU , Disclosures about Short-Duration Contracts, not already addressed elsewhere in statutory reporting were rejected. - SSAP No. 103R added enhanced disclosures for repurchase and reverse-repurchase agreements, and added accounting guidance for short sales, and guidance for secured borrowing transactions when the insurer is the transferee KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

9 Insurance statutory reporting (continued) Effective for 2018 reporting: - SSAP No. 26R provided separate accounting guidance for the use of systematic value for ETF instruments that will be effective January 1, SSAP No. 100R allowed the use of net asset value (NAV) per share as a practical expedient and added disclosures. Early adoption is permitted for 2017 reporting KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

10 ASU , Recognition and measurement of financial assets and financial liabilities

11 Financial instruments ASU , Recognition and measurement of financial assets and financial liabilities Main Changes Available for Sale - equity investments Cost method vs measurement alternative Financial liabilities (fair value option) Deferred taxes, presentation and other disclosures 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 11

12 Financial instruments ASU , Recognition and measurement of financial assets and financial liabilities Available-for-sale - Equity Investments Current GAAP ASU Available for sale changes in fair value recorded in OCI Fair value through Net Income More volatility in Net Income 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12

13 Financial instruments ASU , Recognition and measurement of financial assets and financial liabilities Cost method vs measurement alternative Current GAAP ASU Cost method Measurement alternative may be elected Cost minus impairment Cost minus impairment +/- changes in observable prices Eliminates cost method, but an exception to full FV available 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 13

14 Financial instruments ASU , Recognition and measurement of financial assets and financial liabilities Measurement alternative - +/- Changes in observable prices Changes in observable prices must be From orderly transactions In the same or similar investment of the same issuer Potential challenges Is the transaction orderly? What to do if transaction is not orderly? Identifying observable prices Determining if an investment is similar 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 14

15 Effective date Effective Date Public Business Entities: Fiscal years beginning after December 15, 2017 (including interim periods within those fiscal years) For All Other Entities: Fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2019 Early Adoption Entities that are not public business entities: may adopt for fiscal years beginning after December 15, 2017 (including interim periods within those fiscal years) All entities: may early adopt the provisions related to the recognition of changes in fair value of financial liabilities 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 15

16 Financial instruments Credit losses (ASU )

17 Effective Date SEC filers that are Public Business Entities Fiscal years beginning after December 15, 2019 and interim periods within those years Non-SEC filers that are Public Business Entities Fiscal years beginning after December 15, 2020 and interim periods within those years All of entities Fiscal years beginning after December 15, 2020 and interim periods thereafter Early adoption Fiscal years beginning after December 15,

18 Scope In scope Loans Loan commitments Financial guarantees (not insurance contracts) Trade receivables Reinsurance receivables Lease receivables recognized by a lessor Receivables that result from revenue transactions Loans made by a NFP entity to meet its mission (programmatic loans) Debt securities classified as held-to-maturity Debt securities classified as available-for-sale Out of scope Equity instruments Financial instruments measured at FV through NI Loans and receivables between entities under common control Policy loan receivables of an insurance entity Loans made to participants by defined contribution employee benefit plans Pledge receivables of a not-for-profit entity CECL 18

19 Main areas of change - CECL No probability threshold Expected lifetime loss estimate Estimate future economic conditions Applies to HTM securities 19

20 CECL Measurement overview Historical loss experience adj. for asset specific attributes Adjustments for current economic conditions Reasonable and supportable forecasts Estimate of current expected credit losses?? 20

21 Further CECL measurement considerations Pool assets with similar risk characteristics Do not consider beyond contractual term Consider expected prepayments Not required to recognize a loss when the risk of nonpayment of the amortized cost is zero Beyond reasonable and supportable forecast period, revert to historical loss experience 21

22 AFS credit loss model - Main areas of change Allowance Reversals Floor Cannot consider length of time fair value is below amortized cost 22

23 ASU : Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Topic 220, Reporting Comprehensive Income

24 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Background Tax Cuts and Jobs Act of 2017 established a 21% corporate rate Recognizing the entire effect of the change in tax law in income tax expense (benefit) from continuing operations results in residual income tax effects related to deferred tax assets and liabilities initially recognized in OCI Final Decision On February 14, 2018, the Board issued ASU , Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income The ASU provides companies the option to reclassify residual income tax effects from AOCI to retained earnings The amount of the reclassification is limited to the income tax effects arising from the Act All companies will be required to disclose their policy for releasing income tax effects that remain in AOCI 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 24

25 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income Decisions reached to date Companies that elect to reclassify income tax effects arising from the Act would also disclose: a statement that the election was made to reclassify the income tax effects of the Act, and a description of the other income tax effects related to the Act that have been reclassified Companies that do not elect to reclassify income tax effects arising from the Act should disclose in the period of adoption a statement that they did not elect to reclassify The ASU is effective for interim and annual periods beginning after December 15, 2018 Application as of the beginning of the period of adoption or retrospective application to the periods in which the effects of the Act are recognized is permissible Early adoption is permitted The Board decided to add backwards tracing to its existing research project on income tax simplification 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 25

26 ASC topic 842 Leases Overview of ASU

27 Scope Non-core assets Leases of/to: Long-term leases of land Intangible assets Certain sales with repurchase rights (supplier s perspective) Explore for or use non-regenerative resources Biological assets Inventory Within scope Within scope Outside scope Assets under construction Short-term leases (lease term 12 months) Underlying assets of low value ( $5,000, when new IASB only) Scope with exceptions Comparison to current U.S. GAAP The scope of the new leases standard is substantially aligned with current U.S. GAAP KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

28 Exemptions and practical expedients Short-term leases (lessees only) Leases with a lease term 12 months and do not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise may apply current operating lease accounting If elected, the exemption is applied to all leases within that class of underlying asset Still subject to qualitative and quantitative disclosures Underlying assets of low value (IASB only) Exemption for leases of underlying assets that are individually low in value (e.g., $5,000, when new) even if material in aggregate Leases would be accounted for off-balance sheet under IFRS, but on-balance sheet under U.S. GAAP (if not short-term) Portfolio approach Aspects of the new standard may be applied at a portfolio level (e.g., determination of discount rate and lease term) Must be a reasonable expectation that the portfolio approach is not materially different than application to individual leases 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

29 Overview Lease definition Identified asset Control over the use of the identified asset Lease Asset is explicitly or implicitly specified in the contract Customer has right to obtain substantially all economic benefits from use of the asset Converged FASB/IASB definition Asset is physically distinct or customer has rights to substantially all of the asset s capacity Customer can direct the use of the asset Supplier does not have a substantive substitution right Definition of a lease: A contract that conveys the right to use an asset for a period of time in exchange for consideration 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

30 Step 1 Identify the separate lease components Separating components of a contract A right to use an underlying asset (i.e., a lease), or a bundle of leases, is a separate lease component if both of the following criteria are met: The lessee can benefit from the lease (or bundle of leases) on its own or together with other resources that are readily available to the lessee, and The lease (or bundle of leases) is neither highly dependent on, nor highly interrelated with, the other ROUs in the contract. Separately account for land elements (even if above criteria are not met) unless accounting effect of doing so would be insignificant 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

31 Step 2 Identify any non-lease components Separating components of a contract Contract Lease components Non-lease components (1) Not a component Allocate consideration in the contract (Step 4) Activities (or lessor costs) that do not transfer a good or service to the lessee (2) (1) For example, an arrangement to lease a machine with the lessor responsible for machine maintenance, or to lease office space with the lessor responsible for common area maintenance (2) Examples include a lessee s reimbursement or payment of the lessor s property taxes and insurance 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

32 Step 3 Measure the consideration in the contract (lessee) Separating components of a contract Payments relating to use of the underlying asset 1 Other fixed or in-substance fixed payments Other variable payments that depend on an index or rate 2 Incentives paid or payable to the lessee 3 Consideration in the contract (lessee) 1 See paragraph The payments are calculated using the commencement date index or rate 3 Other than those include in paragraph KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

33 Step 3 Measure the consideration in the contract (lessor) Separating components of a contract Consideration in the contract (lessee) Are there any other variable payments that specifically relate to either: Part 1 The lessor s efforts to transfer one or more goods or services that are not leases? OR An outcome from transferring one or more goods or services that are not leases? No No adjustment necessary Yes Yes Apply variable consideration requirements in Topic 606 to measure the amount to be included in the consideration in the contract: Part 2 Step 1: Estimate the amount using the expected value or most likely amount Step 2: Determine the portion (if any) of that amount for which it is probable that a significant revenue reversal will not subsequently occur Consideration in the contract (lessor) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

34 Step 4 Separate and allocate consideration between lease and non-lease components Separating components of a contract When there is an observable standalone price for each component: When there is not an observable stand-alone price for some or all components: Lessee Unless the practical expedient** is elected, separate and allocate based on the relative standalone price of components. Estimate the standalone price, maximizing the use of observable information. Remember: Lessor Always separate lease and non-lease components. Allocate consideration following the Topic 606 transaction price allocation guidance i.e., generally on a relative standalone selling price basis. Activities (or costs of the lessor) that do not transfer a good or service to the lessee are not components of the contract. Therefore, no consideration is allocated to such items. ** As a practical expedient, a lessee may elect not to separate the non-lease components of a contract from the lease component to which they relate KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

35 Lease classification test Lessee accounting lease classification Ownership transfers at end of the lease term? Lessee purchase option reasonably certain of exercise? Lease term = major part (e.g., 75%) of remaining economic life 1, 2? PV of 1) lease payments + 2) lessee RVG substantially all (e.g., 90%) FV 1? No No No No Specialized asset with no alternative use to lessor? No Operating lease Yes Yes Yes Yes Yes Finance lease 1 Comparison to current U.S. GAAP Assessment criteria are similar to current U.S. GAAP, but without explicit bright lines 2 If the commencement date is at or near the end of the underlying asset s economic life, this test does not apply 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

36 Thresholds for lease classification tests Lessee accounting lease classification Paragraph permits (but does not require) use of bright-line thresholds when performing the lease term and present value tests: Threshold Major part of the remaining economic life Substantially all of the fair value of the underlying asset At or near the end of the economic life of the asset Permitted Bright line 75% = major part 90% = major part 25% of the total economic life remaining = at or near the end May be appropriate to conclude that for some assets < 75% = major part of its remaining economic life if the asset is of a type that degrades in economic utility in a significantly frontloaded manner, while for others > 75% major part of its remaining economic life if asset holds its economic utility or value. Because substantially all is used elsewhere in U.S. GAAP and generally considered similarly, may not be substantial flexibility around that threshold. Generally do not think there is flexibility around 25% at or near the end threshold because it relates to an exception to the classification principle 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

37 Alternative use test New to topic 842 Lessee accounting lease classification Consider: Contractual restrictions Practical limitations Underlying asset being of a highly specialized nature or subject to highly specialized circumstances is key to meeting this test. - Alternative use test not met solely because of contractual restrictions. - Not another lease term test When considering alternative use, consider the characteristics of the asset that will ultimately be returned to the lessor at the end of the lease term (i.e., customizations or modifications agreed on or committed to at lease commencement) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

38 Recognition Lessee accounting Right to use underlying asset Lessor Lessee Lease payments Comparison to current U.S. GAAP For lessees, all leases (other than short-term leases) will be recognized on the balance sheet Presentation of interest expense in the income statement depends on lease classification ROU asset Right to use underlying asset during lease term Lessee A has the right to use the warehouse for 5 years Lease liability Obligation to make future lease payments Lessee A has an obligation to make the 4 remaining, unpaid annual lease payments 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

39 Initial measurement Lease liability Lessee accounting Lease liability Present value of unpaid lease payments Comparison to current U.S. GAAP A lessee initially measures a lease liability (and a right-of-use asset) at the lease commencement date. That is, the date on which the lessor makes the underlying asset available for use by the lessee. Under current U.S. GAAP, the date a company performs its lease classification test and initially measures a capital lease is at lease inception (i.e., the date an agreement is reached) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

40 Initial measurement ROU asset Lessee accounting ROU asset is the sum of: Initial measurement of lease liability Initial direct costs* Prepaid lease payments Lease incentives received * Only incremental costs to obtain the lease qualify no allocation of internal fixed costs is permitted and costs that would have been incurred even if the lease was not obtained (e.g., legal fees to draft the lease contract) are not initial direct costs KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

41 Subsequent measurement ROU asset (Finance leases) Lessee accounting ROU asset Beginning balance Accumulated amortization* Accumulated impairment losses *Amortized, generally on a straight-line basis, over the shorter of the lease term or useful life of the ROU asset - Together with interest expense, results in a front-loaded pattern of total lease cost ASC 360 impairment testing While finance lease accounting (Topic 842) is substantially similar to capital lease accounting (current U.S. GAAP), be aware of definitional differences (lease payments vs. minimum lease payments) and significant changes resulting from the reassessment requirements and new lease modification guidance KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

42 Subsequent measurement ROU asset (Operating leases, FASB only) Lessee accounting Method 1 Derive the ROU asset from the lease liability Lease liability carrying amount Unamortized initial direct costs Prepaid/ (accrued) lease payments Unamortized balance lease incentives received Method 2 Amortize the ROU asset ROU asset Beginning balance Accumulated amortization** P&L: Straight-line total lease cost (see next slide) ASC 360 impairment testing - Once impaired, single lease cost is not straight-line (pattern, but not presentation is equivalent to finance lease). ** The amortization of the right-of-use asset each period is calculated as the difference between the straight-line lease cost for the period (including amortization of initial direct costs) and the periodic accretion of the lease liability using the effective interest method KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

43 Subsequent measurement ROU asset (Operating leases, FASB only) Lessee accounting P&L: Single lease cost - Single lease cost is calculated so that the remaining lease cost is allocated over the remaining lease term generally on a straight-line basis Remaining lease cost Total lease payments for the lease term Total initial direct costs incurred Periodic lease cost previously recognized 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

44 Subsequent measurement and remeasurement Lease liability Lessee accounting Subsequent measurement Lease liability remeasured when Measured at present value of unpaid lease payments throughout the lease term No fair value option The lease is modified and that modification is not accounted for as a separate contract There is a change in: - The assessment of the lease term - The assessment of a purchase option exercise - The amount probable of being owed under a RVG A contingency is resolved resulting in some or all variable lease payments becoming fixed payments Comparison to current U.S. GAAP Under current U.S. GAAP, lease accounting is not revised after commencement unless the lease is modified KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

45 Subleases Subleases Head lessor Apply lessor accounting Head lessee/ intermediate lessor (sublessor) Apply lessee accounting to the head lease Apply lessor accounting to the sublease Generally present gross Sublessee* Apply lessee accounting * Sublease classification based on underlying asset for U.S. GAAP; ROU asset for IFRS Most U.S. GAAP subleases will be classified as operating leases by sub-lessor Most IFRS subleases will be classified as finance leases by sub-lessor 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

46 Lessee presentation Finance leases Presentation Balance sheet Income statement Statement of cash flows ROU assets Separate line-item; or Within another line item, separate from where operating lease ROU assets are presented Lease liabilities Separate line-item; or Within another line item, separate from where operating lease liabilities are presented ROU asset amortization Consistent with presentation of depreciation or amortization of similar assets Interest expense on lease liability Consistent with presentation of other interest expense Principal repayments Financing activities Interest payments In accordance with Topic 230 (typically, in operating activities) Variable lease payments Operating activities 1 1 Unless the payments represent costs to bring another asset into service KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

47 Lessee presentation Operating leases Presentation Balance sheet Income statement Statement of cash flows ROU assets Separate line-item; or Within another line item, separate from where finance lease ROU assets are presented Lease liabilities Separate line-item; or Within another line item, separate from where finance lease liabilities are presented Lease expense Included in lessee s income from continuing operations (operating expense) Lease payments Operating activities, unless payments are for costs to put another asset in service Variable lease payments Operating activities 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

48 Disclosures Disclosures Disclosure Objective: Enable financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases. Lessees New qualitative and quantitative disclosures to provide better information to users. Lessees will exercise judgment to determine the appropriate level at which to aggregate, or disaggregate, disclosures. Lessors New disclosures principally about exposure to residual asset risk KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

49 Example Lessee quantitative disclosure Disclosures This table is an example of how the FASB envisions a lessee might satisfy the quantitative disclosures requirements. However, the FASB has not mandated use of the tabular presentation. Year ending December 31, 20X9 20X8 Lease Cost Finance lease cost: Amortization of right-of-use assets $XXX $XXX Interest on lease liabilities XXX XXX Operating lease cost XXX XXX Short-term lease cost XXX XXX Variable lease cost XXX XXX Sublease income (XXX) (XXX) Total lease cost $XXX $XXX Other Information (Gains) and losses on sale and leaseback transactions, net $(XXX) $XXX Cash paid for amounts included in the measurement of lease liabilities XXX XXX Operating cash flows from finance leases XXX XXX Operating cash flows from operating leases XXX XXX Financing cash flows from finance leases XXX XXX Right-of-use assets obtained in exchange for new finance lease liabilities XXX XXX Right-of-use assets obtained in exchange for new operating lease liabilities XXX XXX Weighted-average remaining lease term finance leases XX Years XX Years Weighted-average remaining lease term operating leases XX Years XX Years Weighted-average discount rate finance leases XX% XX% Weighted-average discount rate-operating leases XX% XX% 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

50 Effective dates Transition Public business entities, certain not-for-profit entities, and certain employee benefit plans Interim and annual periods in fiscal years beginning after December 15, 2018 All other entities Fiscal years beginning after December 15, 2019, and interim periods in fiscal years beginning one year later Early adoption permitted for all entities upon issuance 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

51 Transition overview Transition Transition approach Package of practical expedients (All or nothing) Use of hindsight (Elect on its own or with the package of practical expedients) Apply a modified retrospective transition approach: - Restate all comparative periods presented - No revisions to the accounting for leases that expired prior to date of initial application An entity may elect not to reassess: - Whether expired or existing contracts contain leases under the new definition of a lease; - Lease classification for expired or existing leases; and - Whether previously capitalized initial direct costs would qualify for capitalization under Topic 842. Hindsight allowed when considering likelihood of exercising lessee options to extend or terminate a lease or purchase the underlying asset, and in assessing impairment of ROUs 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

52 Leases FASB update Final standard, ASU Land easements are within the scope of ASC 842. All new, existing or expired land easements are evaluated using ASC 842, unless practical expedient is applied. Provides option to not evaluate existing or expired land easements under ASC 842 that were not previously accounted for as leases under ASC 840. Effective date and transition are the same as ASC 842. If a company has already adopted ASC 842, the amendments are effective immediately KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

53 Leases FASB update (cont d) Proposed ASU, Technical corrections FASB agreed to finalize 16 technical corrections to the new leases guidance based on feedback received from stakeholders. Pending final standard KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

54 Leases FASB update (cont d) Proposed ASU, Targeted improvements OPTIONAL TRANSITION RELIEF All companies may use the effective date of the leases standard as their date of initial application in transition. If a company elects the option, it would not need to adjust its comparative period financial statements for effects of the new standard. Company would recognize its cumulative effect transition adjustment as of the effective date rather than the beginning of the earliest comparative period presented. Even if this relief is finalized, companies should not significantly alter their implementation timeline KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

55 Leases FASB update (cont d) Proposed ASU, Targeted improvements LESSOR PRACTICAL EXPEDIENT A lessor would be permitted not to separate lease and related non-lease components but rather account for them as a single lease component if: The components to be combined have the same timing and pattern of revenue recognition; and The combined component will be classified as an operating lease KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

56 Targeted Improvements to the Accounting for Long-Duration Contracts

57 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Insurance Contracts FASB Initiatives Short-Duration Contracts (Final Standard ASU Issued May 2015) Long-Duration Contracts (Exposure Draft Issued September 2016) Focused efforts on targeted improvements to disclosures Focused efforts on targeted improvements to both accounting and disclosures No change to current U.S. GAAP model for recognition and measurement Change to current U.S. GAAP model for recognition, measurement, presentation and disclosure 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

58 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Agenda Timeline Overview Nonparticipating and limited payment contracts Participating contracts Long-duration contracts with market risk benefits Deferred acquisition costs (DAC) Disclosures 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

59 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Long-duration Insurance Contracts Timeline Proposed ASU issued in September 2016 Feedback from comment letters discussed in February 2017 Public roundtable meeting held in April 2017 Redeliberations in Summer/Fall 2017 Topics redeliberated by the FASB Board: - Nonparticipating traditional and limited-payment insurance contracts August 2, Participating insurance contracts October 4, Measurement of market risk benefits October 4, Amortization of deferred acquisition costs October 4, Presentation and disclosures November 1, 2017 Topics to be deliberated at future meetings: - Sweep issues - Effective date 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

60 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Overview - Changes to Liability for Future Policy Benefits Best Estimate Assumptions Cash flow assumptions updated at least annually on a catch-up basis* * Previously referred to as the retrospective approach Discount rate assumptions updated each reporting period on an immediate basis Reserving Model Retained the net premium reserving model Provision for adverse deviation and premium deficiency reserve removed from determination of the liability ASU Long- Duration Liability Income Statement Impact Cash flow assumption changes reflected in P&L Discount rate assumption changes reflected in OCI Market risk benefit changes reflected in P&L, except for instrument-specific credit risk is reflected in OCI Disclosures Disaggregated rollforwards Information about significant inputs, judgments, assumptions and methods 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

61 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Nonparticipating and Limited Payment Contracts Key Changes Cash Flow Assumptions Unlocking of assumptions is meant to provide more relevant estimates of future policy benefit reserves Key Changes: Updated at least annually in the same quarter every year, but more frequently if experience warrants Unlocked and updated on a catch-up basis (previously the retrospective approach) through net income Expense assumptions updated consistently with other cash flow assumptions, but can elect on an entity-wide basis to not update (lock-in) Discount Rate Unlocking of the discount rate better reflects the market environment of the liabilities Key Changes: Unlocked and updated at each reporting date on an immediate basis in other comprehensive income Determine discount rate using an upper-medium grade, fixed income instrument yield (generally an A rating) Reflected in the Net Premium % Not Reflected in the Net Premium % 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

62 Nonparticipating and Limited Payment Contracts Net Premium Reserving Model Value t = PV (Benefits + Expenses) PV (Net Premium % x Premiums) All Cash Flow Assumptions* Unlocked Net Premium % = PV (Benefits + Expenses) PV (Premiums) * Expense assumptions are to be updated consistently with the updated methodology used for other cash flow assumptions unless an entity-wide election is made to not update the expense assumption 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

63 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Nonparticipating and Limited Payment Contracts - Discount Rate Current practice is that the discount rate can vary depending on the type of insurance contract. Discount rates can be currently based on: expected investment yield, policy crediting rate, or dividend interest rate. Determine discount rate using an upper-medium grade, fixed income instrument yield (generally an A rating) Insurance entities would be required to: - Use reliable information that reflects duration characteristics of the future policy benefit reserves - Maximize the use of observable inputs and minimize the use of unobservable inputs - Use the original discount rate as the interest accretion rate IMPACT: Discount rate on assets and liabilities are no longer connected; therefore, the Asset Liability Management reported discount rate could be out of sync with the financial statement discount rate 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

64 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Nonparticipating and Limited Payment Contracts - Transition Transition Apply to existing carrying amounts at the transition date, adjusted to remove related amounts in accumulated OCI (prospective basis) Option to apply the guidance retrospectively, with a cumulative adjustment to opening retained earnings - Required to use same contract issue year on an entity-wide basis for that issue year and all subsequent issue years - Required to use actual historical experience information IMPACT: Availability of historical information may limit the use of retrospective application for all issue years 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

65 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Participating contracts Under current US GAAP, the future policy benefits liability for participating insurance contracts is measured using a separate accounting model that is different from the model used for nonparticipating insurance contracts. The proposed ASU would have required: - Participating insurance contracts follow the same accounting model as nonparticipating insurance contracts - Assumptions for expected dividend payments, discounted at the same rate as other cash flow assumptions, to be included in the measurement of the liability The Board decided to retain the existing US GAAP guidance on liability measurement and to enhance disclosures. IMPACT: The simplified DAC amortization model will still be used for participating insurance contracts 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS

66 Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts Long Duration Contracts with Market risk Benefits Approach One measurement model for all types of contracts with market risk benefits (e.g. fixed indexed annuities, guaranteed minimum death benefits, accumulation, income, withdrawal, and withdrawal-for-life benefits) Includes both separate account and general account deposit (or account value) products Measured at fair value and presented separately on the statement of financial position Recognize the change in fair value: in other comprehensive income (OCI) when attributable to a change in the instrument-specific credit risk remainder as a separate line item in the statement of operations Market risk Benefits Contract feature that exposes an insurance entity to otherthan-nominal capital market risk from: 1) A contract feature that protects the account balance from adverse capital market performance 2) A contract feature that causes variability in the account balance in response to capital market volatility IMPACTS: 1. Contract features that were previously embedded derivatives may now be market risk benefits 2. Increased volatility in the P&L due to changes in FV 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS