Fall 2016 GAAP Update. Michigan IASA

Transcription

1 Fall 2016 GAAP Update Michigan IASA September 22, 2016

2 Learning Objectives Understand the standards that are effective for the current year-end audits Learn the key accounting standard updates that have been issued during 2016, but are not yet effective Identify future FASB projects 2

3 Insurance Contracts Project Background What was the project? A joint effort between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to create a comprehensive accounting standard for insurance contracts that began in the fourth quarter of What is it now? FASB abandoned the joint project with the IASB in February 2014 in favor of making targeted improvements to U.S. GAAP. Short-duration: Targeted improvements to disclosure requirements Long-duration: Targeted improvements including recognition, measurement, presentation and disclosure. 3

4 Issuance of ASU FASB Issued ASU in May of 2015 Effective for public entities with fiscal year ends beginning after December 15, 2015 (2016 for calendar YE entities) Interim periods within annual periods beginning after December 15, 2016 Effective for all other entities for annual periods beginning after December 15, 2016 (2017 for calendar YE entities) Early application permitted 4

5 Short-Duration - Why are we Discussing Now? ASU requires retroactive application by providing comparative disclosures for each period presented Will require most companies to accumulate information beginning in 2008 for presentation in the 2017 disclosures 5

6 Why the Change? Per the ASU FASB believes additional disclosures will: Increase transparency for significant estimates made in measuring the liability for loss and loss adjustment expenses Provide insight into reporting entity's ability to underwrite and anticipate costs associated with claims Improve comparability between companies Provide financial statement users with information to analyze amount, timing and uncertainty of cash flow 6

7 Why are Disclosures Included as RSI? Concerns raised over auditor independence Would auditor independence be required for all 10 years of historical data presented? Previous claims system implementation work when not the auditor could cause problems later Potential concerns in business combinations, large multi reporting entities AICPA Professional Ethics Executive Committee (PEEC) and others began looking into this question Existing model under GASB where similar disclosures are made as Required Supplementary Information (RSI) FASB revised to indicate detail other than for the current reporting periods are supplementary information 7

8 Independence The AICPA issued an interpretation to AU-C Section 9180 in August 2015, which clarifies Auditors are only required to be independent with respect to the period being audited and covered by the auditors opinion Opinion does not generally extend to RSI as RSI is not part of the basic financial statements Work conducted by auditors on RSI, under GAAS is limited to: Inquiry of management Comparison of RSI for consistency with knowledge gained in audit of the basic financial statements Auditor procedures and independence consideration would be different if opinion was extended to cover RSI or RSI was directly included in the financial statement disclosures 8

9 Insurance Contracts: Long-Duration FASB still deliberating Currently drafting a revised exposure draft, to be released by the end of Q Will likely push effective date to 2019 or 2020 It s clear there will be significant changes from current model Building block approach Update of assumptions annually for traditional, limited payment and participating contracts Deferred acquisition costs Discounting 9

10 GAAP Standards Effective in 2016 Updates effective for nonpublic business entities (Non - PBE) for annual periods beginning after December 15, 2015 with potential for more impact to Insurance Industry: ASU Fair Value Measurement: Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share Removed NAV Securities from FV Hierarchy when practical expedient is used ASU Income Statement Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items ASU Presentation of Financial Statements Going Concern: Disclosures of Uncertainties about an Entity s Ability to Continue as a Going Concern 10

11 GAAP Standards Effective in 2016 (cont.) The following are other new GAAP Standards effective for non PBEs for annual periods beginning after December 15, 2015: ASU Compensation Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ASU Receivables Troubled Debt Restructurings by Creditors: Classification of Government-Guaranteed Mortgage Loans Upon Foreclosure ASU Derivatives and Hedging: Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity ASU Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments 11

12 2016 GAAP Update Cloud Computing Arrangements ASU Customer s Accounting for Fees Paid in a Cloud Computing Arrangement If both requirements are met, a company can capitalize the associated fees, similar to how they would account for any other software fees. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty; and It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Calendar Year End PBE Q NON-PBE

13 ASUs Issued, but Not Effective in 2016 The following are new GAAP Standards issued during 2016: Financial Instruments (FI): ASU Financial Instruments Recognition and Measurement of Financial Assets and Financial Liabilities ASU Derivatives and Hedging Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ASU Derivatives and Hedging Contingent Put and Call Options in Debt Instruments ASU Financial Instruments Measurement of Credit Losses on Financial Instruments ASU Leases 13

14 ASUs Issued, but Not Effective in 2016 (cont.) Additional new GAAP Standards issued during 2016: Revenue Recognition: ASU Principal versus Agent Considerations ASU Identifying Performance Obligations and Licensing ASU Narrow-Scope Improvements and Practical Expedients ASU Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) Rescission of SEC Guidance 14

15 ASUs Issued, but Not Effective in 2016 (cont.) Additional new GAAP Standards issued during 2016: ASU Not-for-Profit Entities Presentation of Financial Statements of Not-for-Profit Entities ASU Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments 15

16 Financial Instruments (FI) FASB completed deliberations in November 2015 and final standards issued in early 2016 for: Classification and Measurement Issued ASU January 2016 Credit Impairment Issued ASU June 2016 Hedging released through various ASUs during Q

17 FI Classification & Measurement Effective dates set at November 2015 meeting: PBE Annual periods beginning after December 15, 2017 Non PBE Annual periods beginning after December 15, 2018 Retains Held to Maturity (HTM), Available for Sale (AFS) and Trading Scraps cash flow and business model approach in ED Retains Fair Value (FV) Option 17

18 FI Classification & Measurement (cont.) Key Change - Equity Investments Now required to be measured at FV through net income No OCI for equity securities Regardless of classification (HTM, AFS, Trading) Increased volatility to income statement for insurance entities Practical expedient added for equity investments without readily determinable FV 18

19 FI Classification & Measurement (cont.) Other changes of note: Securities at amortized cost (AC) on balance sheet no longer require FV disclosures Retrospective transition model i.e. cumulative-effect adjustment to beginning equity at beginning of the earliest reporting period presented 19

20 FI Derivatives and Hedging Items of note: A change in the counterparty to a derivative instrument that is designated as hedging does not require dedesignation of the hedging relationship When a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. 20

21 FI Credit Losses ASU Measurement of Credit Losses on Financial Instruments Intended to improve financial reporting by requiring more timely recording of credit losses on loans and other financial instruments Requires the measurement of all expected credit losses to be based on historical experience, current conditions, and reasonable forecasts Forward looking approach Effective dates: PBE Annual periods beginning after December 15, 2019 Non PBE Annual periods beginning after December 15,

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

23 23 Source: FASB In-Focus 2/25/2016

24 Leases (cont.) Key Concepts from Lessee prospective: Lessees will recognize: A right of use (ROU) asset at cost of present value (PV) of lease payments adjusted for additional direct costs, prepayments to lessor or lease incentives A lease liability at PV of expected lease payments Two models for subsequent measurement Type A similar to capital leases Type B similar to operating leases Optional exemption for short-term leases 24

25 25 Leases (cont.)

26 Leases (cont.) Type A Lease (Finance Lease) Type B Lease (Operating Lease) Lease Liability = beginning liability accreted based on interest method Lease Liability = PV of remaining lease payments Discount rate determined at lease commencement Discount rate determined at lease commencement Reduce for lease payments made ROU Asset Amortize on straight-line basis over shorter of lease term or asset useful life ROU Asset = lease liability adjusted for prepaid or accrued rents, any lease incentives received and initial direct costs Financial Impact: Financial Impact: Generally front-loads expense - similar to loan amortization Separate interest expense and amortization expense on income statement Generally straight-line expense Single line of lease or rent expense on income statement 26 Results similar to a financed asset purchase

27 Revenue Recognition FASB issued ASU in May 2014 Later deferred by ASU due to complexity Current effective date: PBE Annual periods beginning after December 15, 2017 Non PBE Annual periods beginning after December 15, 2018 Given complexity: FASB / IASB created a Joint Transition Resource Group for Revenue Recognition (TRG) Discussing and providing guidance on implementation issues AICPA 16 Industry Task Forces Developing non authoritative industry guidance Issued 4 new revenue related standards in 2016 to clarify ASU

28 Revenue Recognition (cont.) Good News Insurance contracts (under ASC 944) are specifically exempt! Bad News Insurance industry is still impacted Third-party administrators (TPA) Asset management Managed care organizations (ASO) Insurance and reinsurance brokers 28

29 Long-term GAAP Projects Focus is now on updating and clarifying disclosure requirements, as well as various other targeted improvement projects. Long duration insurance contracts Liabilities and equity targeted improvements Disclosures: Defined benefit plans Fair value measurement Income taxes 29

30 Key GAAP Items to Remember Cloud Computing Helpful new guidance Big Changes to come: 2017 Expanded loss disclosures 2019 Equities mark to market through net income 2019 New Rev Rec for non-insurance revenue 2020 Investment impairment model changes 2020 Lease accounting change 30

31 Questions? Tim Nowak Partner Johnson Lambert LLP Heidi DeVette Sr. Manager Johnson Lambert LLP

32 32 Appendix

33 Short Duration Contracts: Key Disclosures Changes Net loss development AY paid & incurred Claim counts IBNR + expected development Reconciliation of incurred & paid development Average annual % payout 33

34 Short Duration Contracts: Key Disclosures Changes Changes in judgments or methodologies Discounting 34

35 Example loss development, IBNR & claim counts Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance in thousands As of December 31, 2016 For the Years Ended December 31, Accident Year Total of Incurred-but- Not-Reported Liabilities Plus Expected Development on Reported Claims Cumulative Number of Reported Claims 2007 $10,000 $9,900 $9,700 $9,800 $9,750 $9,750 $9,600 $9,650 $9,575 $9,550 $ ,950 11,000 10,500 10,750 10,850 10,600 10,250 10,150 10, ,000 11,750 11,500 10,900 10,900 10,850 10,750 10, ,250 12,500 12,550 12,400 12,200 12,150 12, ,300 12,500 12,650 12,750 12,800 12, ,800 12,900 12,750 12,700 12,700 1, ,000 13,250 13,100 13,150 1, ,150 13,250 13,300 2, ,500 13,250 3, ,750 5, Total $121,300 Source: FASB ASU Implementation Guidance 35

36 Example paid activity Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance in thousands For the Years Ended December 31, Accident Year $ 3,000 $ 5,000 $ 5,500 $ 6,000 $ 6,800 $ 7,500 $ 8,500 $ 9,000 $ 9,050 $ 9, ,500 5,750 6,500 7,500 7,750 8,250 8,500 9,000 9, ,750 6,000 6,500 7,500 7,900 8,250 8,950 9, ,750 6,250 7,250 7,750 8,900 9,700 9, ,250 5,500 6,750 8,000 8,950 9, ,125 5,250 7,000 8,000 9, ,500 5,750 7,250 7, ,600 6,000 6, ,750 6, ,850 Total $ 82,150 All outstanding liabilities before 2007, net of reinsurance 1,400 Source: FASB ASU Implementation Guidance 36 Liabilities for claims and claim adjustment expenses, net of reinsurance $40,550

37 Average annual % payout Percentage of Claims Paid in Year 1 Percentage of Claims Paid in Year 2 Accident Year Claims Paid in Year 1 (A) Most Recently Reestimated Incurred Claims (B) Percentage of Claims Paid in Year 1 (A) / (B) = ( C ) Accident Year Total Claims Paid End of Year 2 (D) Claims Paid in Year 2 (D) - (A) = (E) Percentage of Claims Paid in Year 2 (E) / (B) 2007 $ 3,000 $ 9, % 2007 $ 5,000 $ 2, % ,500 10, % ,750 2, % ,750 10, % ,000 2, % ,750 12, % ,250 2, % ,250 12, % ,500 1, % ,125 12, % ,250 1, % ,500 13, % ,750 1, % ,600 13, % ,000 1, % ,750 13, % ,125 1, % ,850 13, % Average 33.8% Average 14.9% Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance Years % 14.9% 8.5% 7.2% 6.6% 4.9% 5.4% 5.7% 2.7% 0.3% Source: FASB ASU Implementation Guidance 37

38 Example reconciliation to balance sheet Net outstanding liabilities December 31, 2016 Homeowners' insurance $ 40,550 Other short-duration insurance lines 1,976 Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526 Reinsurance recoverable on unpaid claims Homeowners' insurance 13,880 Other insurance lines 283 Total reinsurance recoverable on unpaid claims 14,163 Insurance lines other than short-duration 3,315 Unallocated claims adjustment expenses 2,420 Other 10 5,745 Total gross liability for unpaid claims and claim adjustment expense $ 62,434 Source: FASB ASU Implementation Guidance 38

39 Short Duration Contracts Implementation Considerations How to aggregate (by line of business, geography, segment, commercial vs. personal lines, etc.) Reinsurance LPTs / Novation how do you reflect new reserves Reinsurance over multiple lines Claims counts companies measure differently Data integrity First time presenting this much detail Potential for different aggregation than Schedule P Consolidation Acquisitions Impact on development patterns How do you reflect new reserves 39