SPEAKERS: CHRISTOPHER HOWELL BRANDON MOTT

Transcription

1 SPEAKERS: CHRISTOPHER HOWELL BRANDON MOTT 1

2 GAAP AND STATUTORY ACCOUNTING AND REPORTING UPDATE Presented by Chris Howell and Brandon Mott

3 GAAP Accounting Revisions 3 Effective 2016 ASU No , Income Statement Extraordinary and Unusual Items (Subtopic ) Effective 2017 ASU No , Presentation of Financial Statements Going Concern (Subtopic ) Effective 2017 (2016 for public business entities) ASU No , Financial Services Insurance (Topic 944) Effective 2018 (2017 for public business entities) ASU No , Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ASU No , Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

4 GAAP Accounting Revisions 4 Effective 2019 (2018 for public business entities) ASU No , Financial Instruments Overall (Subtopic ): Recognition and Measurement of Financial Assets and Financial Liabilities ASU No , Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) ASU No , Revenue from Contracts with Customers (Topic 606) ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ASU No , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ASU No , Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing ASU No , Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients Effective 2020 (2019 for public business entities) ASU No , Leases (Topic 842)

5 GAAP Accounting Revisions 5 Exposed for Comment Proposed ASU Income Taxes (Topic 740): Disclosure Framework Changes to the Disclosure Requirements for Income Taxes Proposed Statement of Financial Accounting Concepts Concept Statement 8 Conceptual Framework for Financial Reporting Chapter 7: Presentation

6 ASU No , Income Statement Extraordinary and Unusual Items (Subtopic ) 6 Eliminates the Concept of Extraordinary Items Users informed the Board that the concept of extraordinary items causes uncertainty because it is unclear when an item should be considered both unusual and infrequent. Others indicated the classification and presentation is not necessary to identify those events and transactions, and is rare. The amendments retain and expand the presentation and disclosure guidance for items that are unusual in nature or occur infrequently. Effective for fiscal years, and interim reporting periods within those fiscal years, beginning after December 15, The amendments can be applied prospectively. The amendments can also be applied retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. Effective 2016

7 ASU No , Presentation of Financial Statements Going Concern (Subtopic ) 7 Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern Provides guidance about management s responsibility to evaluate whether there is substantial doubt about an entity s ability to continue as a going concern. Also provides related footnote disclosures, which should reduce diversity in the timing and content of footnote disclosures. Three disclosures required: 1) Principal conditions or events that raise/raised substantial doubt; 2) Management s evaluation of the significance of those conditions or events in relation to the entity s ability to meet its obligations; and 3) Management s plans that alleviated, or are intended to mitigate, the conditions or events that raise/raised substantial doubt. Effective for the annual reporting period ending after December 15, 2016, and for annual and interim reporting periods thereafter. Early application is permitted. Effective 2017

8 ASU No , Financial Services Insurance (Topic 944) 8 Requires Additional Disclosures The Board, in 2013, proposed amendments for different recognition and measurement models for short-duration insurance contracts. The feedback overwhelmingly supported retaining existing guidance for shortduration contracts, but favored additional disclosures about the liability for unpaid claims and claim adjustment expenses to increase transparency of significant estimates made in measuring those liabilities. The objective of the amendments in the Update is to provide additional insight into an insurance entity s ability to underwrite and anticipate costs associated with claims. Effective 2016/2017

9 ASU No , Financial Services Insurance (Topic 944) 9 Requires Additional Disclosures Additional disclosures include: Development information by accident year on a net basis Reconciliation of development information to aggregate carrying amount of the liability IBNR plus expected development for each accident year presented Quantitative information about claim frequency and qualitative description of methodologies used for determining claim frequency information Average annual percentage payout of incurred claims by age for the accident years presented Effective for public entities for annual periods beginning after December 15, 2015, and interim reporting periods within annual periods beginning after December 31, Effective for all other entities for annual periods beginning after December 15, 2016, and interim reporting periods within annual periods beginning after December 15, Early application is permitted. Effective 2016/2017

10 10 ASU No , Financial Services Insurance (Topic 944) Excerpt of Required Disclosures Effective 2016/2017

11 11 ASU No , Financial Services Insurance (Topic 944) Excerpt of Required Disclosures Effective 2016/2017

12 12 ASU No , Financial Services Insurance (Topic 944) Excerpt of Required Disclosures Effective 2016/2017

13 ASU No , Income Taxes (Topic 740) 13 Balance Sheet Classification of Deferred Taxes Current GAAP requires the separation of deferred tax assets and liabilities into current and noncurrent amounts in a classified balance sheet. Stakeholders informed the Board that the result is little or no benefit because the classification does not align with the expected settlement time period for these deferred items. Others noted costs incurred to separate deferred amounts into current and noncurrent. The amendments in this Update require that deferred tax assets and liabilities be classified as noncurrent. Effective 2017/2018

14 14 ASU No , Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes Effective for interim and annual reporting periods beginning on or after December 15, 2016, for public business entities. Effective for annual reporting periods beginning on or after December 15, 2017, and interim reporting periods within annual reporting periods beginning on or after December 15, 2018, for all other entities. Early adoption is permitted for all entities. Effective 2017/2018

15 ASU No , Compensation Stock Compensation (Topic 718) 15 Improvements to Employee Share-Based Payment Accounting Involve several aspects of the accounting for share-based payment transactions, including: Income tax consequences Classification of awards as either equity or liabilities Classification on the statement of cash flows Measurement Income tax consequences Current GAAP Different accounting treatment for excess tax benefit (additional paid-in capital) or tax deficiency (liability) due to difference between the deduction for tax purposes and the compensation cost recognized for financial reporting purposes. Simplification Excess tax benefits and deficiencies to be recognized as income tax expense or benefit in the income statement. Classification on the Statement of Cash Flows Effective 2017/2018 Current GAAP Excess tax benefits must be separated from other income tax cash flows and classified as a financing activity. No guidance on classification of cash paid by an employer when directly withholding shares for tax-withholding purposes. Simplification Excess tax benefits should be classified along with other income tax cash flows as an operating activity. Cash paid by an employer when directly withholding shares for tax-withholding purposes should be classified as a financing activity.

16 ASU No , Compensation Stock Compensation (Topic 718) 16 Improvements to Employee Share-Based Payment Accounting Measurement Current GAAP Nonpublic entities were provided an option to measure all liability-classified awards at intrinsic value. However, some were not aware of that option. Simplification A nonpublic entity can make a one-time accounting policy election to switch from measuring all liability-classified awards at fair value to intrinsic value. For public business entities, effective for annual reporting periods beginning on or after December 15, 2016, and interim periods within those annual periods. For all other entities, effective for annual reporting periods beginning on or after December 15, 2017, and interim reporting periods within annual reporting periods beginning on or after December 15, Early adoption is permitted for all entities. Effective 2017/2018

17 ASU No , Financial Instruments Overall (Subtopic ) 17 Recognition and Measurement of Financial Assets and Financial Liabilities Primary objective of this Update is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. The amendments make (8) targeted improvements to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Effective 2018/2019

18 ASU No , Financial Instruments Overall (Subtopic ) 18 Recognition and Measurement of Financial Assets and Financial Liabilities 1. Require equity investments to be measured at fair value with changes in fair value recognized in net income. 2. Requires a qualitative assessment to identify impairment of equity investments without readily determinable fair values. 3. Eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for nonpublic business entities. 4. Eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. Effective 2018/2019

19 ASU No , Financial Instruments Overall (Subtopic ) 19 Recognition and Measurement of Financial Assets and Financial Liabilities 5. Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 6. Requires separate presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value. 7. Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (e.g. securities, loans, receivables) on the balance sheet or the accompanying notes to the financial statements. 8. Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity s other deferred tax assets. Effective 2018/2019

20 ASU No , Financial Instruments Overall (Subtopic ) 20 Recognition and Measurement of Financial Assets and Financial Liabilities For public business entities, effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Early adoption is permitted for all nonpublic business entities as of fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Effective 2018/2019

21 ASU No , Statement of Cash Flows (Topic 230) 21 Classification of Certain Cash Receipts and Cash Payments Primary objective of this Update is to improve GAAP by providing specific guidance on eight cash flow classification issues, reducing the current and potential future diversity in practice. 1. Debt Prepayment or Debt Extinguishment Costs Should be classified as financing activities. 2. Settlement of Zero-Coupon Debt Issuer should classify payments attributable to accreted interest as operating activities and payments attributable to principal as financing activities. 3. Contingent Consideration: Payments NOT made soon after a business combination Up to the amount of the liability recognized at the acquisition date should be classified as financing activities. Excess should be classified as operating activities. Payments made soon after a business combination should be classified as investing activities. Effective 2018/2019

22 ASU No , Statement of Cash Flows (Topic 230) 22 Classification of Certain Cash Receipts and Cash Payments 4. Proceeds from the Settlement of Insurance Claims Should be classified based on the nature of each loss included in the settlement (e.g. business interruption operating activities, loss or damage to equipment investing activities). 5. Proceeds from the Settlement of Corporate-Owned Life Insurance Policies Should be classified as investing activities. 6. Distributions Received from Equity Method Investees Accounting policy election to use: Cumulative earnings approach in general, distributions received are considered returns on investment and classified as operating activities. Nature of the distribution approach in general, distributions received should be classified based on the nature of the activity or activities of the investee that generated the distribution as either a return on investment (operating activity) or return of investment (investing activity). May result in a change in accounting principle on a retrospective basis. Effective 2018/2019

23 ASU No , Statement of Cash Flows (Topic 230) 23 Classification of Certain Cash Receipts and Cash Payments 7. Beneficial Interests in Securitization Transactions Cash receipts from payments on a transferor s securitized trade receivables should be classified as investing activities. 8. Separately Identifiable Cash Flows and Application of the Predominance Principle classification should first be determined by applying specific guidance in GAAP, next based on the nature of the underlying cash flows, and lastly based on the predominant source or use of the cash flows for the item. Effective 2018/2019

24 ASU No , Statement of Cash Flows (Topic 230) 24 Classification of Certain Cash Receipts and Cash Payments For public business entities, effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, Early adoption is permitted for all entities. Effective 2018/2019

25 ASU No , Revenue from Contracts with Customers (Topic 606) 25 Why? Resulted from differences between U.S. GAAP and IFRS. Also, current U.S. GAAP is comprised of broad revenue recognition concepts (Concepts Statement No. 5 when realized or realizable and earned) together with many requirements for particular industries or transactions, which sometimes resulted in different accounting for similar transactions. Joint project between FASB and IASB to clarify principles for recognizing revenue and to develop a common revenue standard that would: Remove inconsistencies and weaknesses in revenue requirements. Provide a more robust framework for addressing revenue issues. Improve comparability of revenue recognition practices. Provide more useful information to users of financial statements through improved disclosure requirements. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. Companion IFAS is IFRS 15. Effective 2018/2019

26 26 ASU No , Revenue from Contracts with Customers (Topic 606) Core Principle An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Apply the following steps: 1. Identify the contract(s) with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the entity satisfies a performance obligation. Effective 2018/2019

27 27 ASU No , Revenue from Contracts with Customers (Topic 606) Step 1 Identify the Contract(s) with a Customer. Is there a contract, or just a loose understanding? Contracts must meet the following conditions: 1. Approval and commitment of the parties..written or oral 2. Identification of the rights of the parties..what is each giving and receiving 3. Identification of the payment terms..how much and what is being exchanged for goods/services being supplied 4. Commercial substance..economic worth 5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer...are you going to get paid In some cases, an entity should combine contracts and account for them as one contract. Effective 2018/2019

28 28 ASU No , Revenue from Contracts with Customers (Topic 606) Step 2 Identify the Performance Obligations in the Contract. Who is doing what? What is being delivered to the customer goods, services, or both? Performance obligation a promise to transfer a good or service to a customer. If there is a promise to deliver more than one good or service, each promised good or service should be accounted for as a performance obligation only if it is: 1. Distinct, or 2. A series or distinct goods or services that are substantially the same and have the same pattern of transfer. Effective 2018/2019

29 29 ASU No , Revenue from Contracts with Customers (Topic 606) Step 2 Identify the Performance Obligations in the Contract. A good or service is distinct if both of the following criteria are met: 1. Capable of being distinct The Customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer. 2. Distinct within the context of the contract The promise to transfer the good or service is separately identifiable from other promises in the contract. A good or service that is not distinct should be combined with other promised goods or services until a distinct bundle of goods or services is identified. Effective 2018/2019

30 30 ASU No , Revenue from Contracts with Customers (Topic 606) Step 3 Determine the Transaction Price. Should consider the effects of the following: 1. Variable consideration estimate expected or likely amount including discounts, rebates, refunds, etc. using historical and forecasted information. 2. Constraining estimates of variable consideration events that could have a major impact on the contract, including events outside the entity s control (e.g. weather). 3. Existence of a significant financing component may need to discount expected payment(s) if more than one year away. 4. Noncash consideration should be measured at fair value. 5. Consideration payable to the customer should reduce the transaction price. Effective 2018/2019

31 31 ASU No , Revenue from Contracts with Customers (Topic 606) Step 4 Allocate the Transaction Price to the Performance Obligations in the Contract. Revenue should be recognized as each separate performance obligation is completed. What is the stand-alone price at contract inception of the distinct goods or services underlying each performance obligation? Effective 2018/2019

32 32 ASU No , Revenue from Contracts with Customers (Topic 606) Step 5 Recognize Revenue When (or as) Performance Obligations are Satisfied. A performance obligation is satisfied when a good or service is transferred. A good or service is transferred when the customer obtains control of that good or service. Control of a good or service can be transferred over time or at a point in time. Effective 2018/2019

33 33 ASU No , Revenue from Contracts with Customers (Topic 606) Step 5 Recognize Revenue When (or as) Performance Obligations are Satisfied. A good or service is transferred, a performance obligation is satisfied, and revenue is recognized over time if one of the following criteria is met: The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs. The entity s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. The entity s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. Effective 2018/2019

34 34 ASU No , Revenue from Contracts with Customers (Topic 606) Step 5 Recognize Revenue When (or as) Performance Obligations are Satisfied. If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a point in time. Various factors should be considered in determining the point at which a customer obtains control of a promised asset, which include, but are not limited to the following: The entity has a present right to payment for the asset. The customer has legal title to the asset. The entity has transferred physical possession of the asset. The customer has the significant risks and rewards of ownership of the asset. The customer has accepted the asset. Effective 2018/2019

35 35 ASU No , Revenue from Contracts with Customers (Topic 606) Step 5 Recognize Revenue When (or as) Performance Obligations are Satisfied. For each performance obligation satisfied over time, an entity shall recognize revenue over time by consistently applying a method of measuring the progress toward complete satisfaction of that performance obligation. The measure of progress (depicting performance to date) should be updated as circumstances change over time. Effective 2018/2019

36 36 ASU No , Revenue from Contracts with Customers (Topic 606) Required Disclosures An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty or revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about: 1. Contracts with customers including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations) Effective 2018/2019

37 37 ASU No , Revenue from Contracts with Customers (Topic 606) Required Disclosures 2. Significant judgments and changes in judgments determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations 3. Assets recognized from the costs to obtain or fulfill a contract. Effective 2018/2019

38 38 ASU No , Revenue from Contracts with Customers (Topic 606) Application Methods An entity should apply the amendments using one of the following two methods: 1. Retrospectively to each prior reporting period presented. 2. Retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. If any entity elects this transition method it also should provide the additional disclosures in reporting periods that include the date of initial application of: a. The amount by which each financial statement line item is affected in the current reporting period by the application of this Update as compared to the guidance that was in effect before the change. b. An explanation of the reasons for significant changes. ASU No permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented. Effective 2018/2019

39 39 ASU No , Revenue from Contracts with Customers (Topic 606) For public business entities, originally effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption was not originally permitted for public business entities. For all other entities, originally effective for annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, Early adoption is permitted for all other entities, but not earlier than an annual reporting period beginning after December 15, ASU No , Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date deferred the effective date of ASU No for all entities by one year. Early adoption is permitted as originally indicated in ASU No Effective 2018/2019

40 40 ASU No , Revenue from Contracts with Customers (Topic 606) Additional Guidance ASU No , Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) Principal A principal satisfies a performance obligation and recognizes revenues as it transfers the good or service to the customer. OR Agent An agent satisfies a performance obligation and recognizes revenue as it arranges for the good or service to be provided by the other party to the customer. Effective 2018/2019

41 41 ASU No , Revenue from Contracts with Customers (Topic 606) Additional Guidance ASU No , Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing Not required to assess promised goods or services (performance obligations) if they are immaterial in the context of the contract with the customer. Includes guidance on a license grant providing a customer with either a right to use the entity s intellectual property (which is satisfied at a point in time) or a right to access the entity s intellectual property (which is satisfied over time). Effective 2018/2019

42 42 ASU No , Leases (Topic 842) Why? Previous lease accounting was criticized for not requiring lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This Update does not fundamentally change lessor accounting. Some modifications to lessor accounting to conform and align with lessee guidance and other areas within GAAP. Effective 2019/2020

43 43 ASU No , Leases (Topic 842) Core Principal The Update requires recognition by lessees of assets and liabilities arising from leases classified as operating leases under previous GAAP. Distinction between finance leases and operating leases. Substantially similar to classification criteria for distinguishing between capital leases and operating leases in the previous lease guidance. Critical distinction under previous GAAP was is it a capital lease or an operating lease. Critical distinction under this Update will be is it a lease contract or a service contract. Effective 2019/2020

44 44 ASU No , Leases (Topic 842) For finance leases, a lessee is required to do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the prevent value of the lease payments, on the balance sheet 2. Recognize interest on the lease liability separately from amortization of the right-to-use asset in the statement of comprehensive income 3. Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows Effective 2019/2020

45 45 ASU No , Leases (Topic 842) For operating leases, a lessee is required to do the following: 1. Recognize a right-of-use asset and a lease liability, initially measured at the prevent value of the lease payments, on the balance sheet 2. Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis 3. Classify all cash payments within operating activities in the statement of cash flows Effective 2019/2020

46 46 ASU No , Leases (Topic 842) Practical Expedient Election This Update requires the separation of lease components from the nonlease components in a contract. Only the lease components must be accounted for in accordance with this Update. Consideration attributable to nonlease components is not a lease payment and, therefore, is not included in the measurement of lease assets or lease liabilities. Lessees may make an accounting policy election by class of underlying asset not to separate lease components from nonlease components and account for the nonlease components together with the related lease components as a single lease component. Effective 2019/2020

47 47 ASU No , Leases (Topic 842) Disclosures This Update requires qualitative disclosures along with specific quantitative disclosures. A lessee shall disclose all of the following: a) Information about the nature of its leases, including: 1. A general description of those leases. 2. The basis and terms and conditions on which variable lease payments are determined. 3. The existence and terms and conditions of options to extend or terminate the lease. A lessee should provide narrative disclosure about the options that are recognized as part of its right-to-use assets and lease liabilities and those that are not. 4. The existence and terms and conditions of residual value guarantees provided by the lessee. 5. The restrictions or covenants imposed by the leases (e.g. additional financial obligations). A lessee should identify the information relating to subleases included in the disclosures provided in (1) through (5), as applicable. Effective 2019/2020

48 48 ASU No , Leases (Topic 842) Disclosures This Update requires qualitative disclosures along with specific quantitative disclosures. A lessee shall disclose all of the following: b) Information about leases that have not yet commenced but that create significant rights and obligations for the lessee, including the nature of any involvement with the construction or design of the underlying asset. c) Information about the significant assumptions and judgments made in applying the requirements of Topic 842, which may include the following: 1. The determination of whether a contract contains a lease 2. The allocation of the consideration in a contract between lease and nonlease components 3. The determination of the discount rate for the lease. Effective 2019/2020

49 49 ASU No , Leases (Topic 842) Disclosures This Update requires qualitative disclosures along with specific quantitative disclosures. A lessee shall also disclose, for each period presented in the financial statements, amounts related to a lessee s total lease cost, which includes both amounts recognized in profit or loss during the period and any amounts capitalized as part of the cost of another asset in accordance with other Topics, and the cash flows arising from lease transactions. A lessee shall disclose a maturity analysis of its finance lease liabilities and its operating lease liabilities separately, showing the undiscounted cash flows on an annual basis for a minimum of each of the first five years and a total of the amounts for the remaining years. Effective 2019/2020

50 50 ASU No , Leases (Topic 842) Disclosures This Update requires qualitative disclosures along with specific quantitative disclosures. A lessee shall disclose a reconciliation of the undiscounted cash flows to the finance lease liabilities and operating lease liabilities recognized in the statement of financial position. A lessee shall disclose lease transactions between related parties. A lessee that elects the practical expedient on not separating lease components from nonlease components shall disclose its accounting policy election and which class or classes of underlying assets it has elected to apply the practical expedient. Effective 2019/2020

51 51 ASU No , Leases (Topic 842) Transition Modified Retrospective Approach Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes various optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-ofuse asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Effective 2019/2020

52 52 ASU No , Leases (Topic 842) For public business entities, effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, Early adoption is permitted for all entities. Effective 2019/2020

53 Proposed ASU Income Taxes (Topic 740) 53 Disclosure Framework Changes to the Disclosure Requirements for Income Taxes The following additional disclosures would be required by Topic 740 for all entities: 1. Description of an enacted change in tax law that is probably to have an effect on the reporting entity in a future period 2. Income (or loss) from continuing operations before income tax expenses (of benefit) disaggregated between domestic and foreign 3. Income tax expenses (of benefit) from continuing operations disaggregated between domestic and foreign Exposed for Comment

54 Proposed ASU Income Taxes (Topic 740) 54 Disclosure Framework Changes to the Disclosure Requirements for Income Taxes The following additional disclosures would be required by Topic 740 for all entities: 4. Income taxes paid disaggregated between domestic and foreign, and the amount of income taxes paid to any country that is significant to total income taxes paid 5. An explanation of circumstance that caused a change in assertion about the indefinite reinvestment of undistributed foreign earnings and the corresponding amount of those earnings Exposed for Comment

55 Proposed ASU Income Taxes (Topic 740) 55 Disclosure Framework Changes to the Disclosure Requirements for Income Taxes The following additional disclosures would be required by Topic 740 for all entities: 6. The aggregate of cash, cash equivalents, and marketable securities held by foreign subsidiaries. There are additional disclosure requirements for public business entities. Comments to the Board due by September 30, 2016 Exposed for Comment

56 Proposed Statement of Financial Accounting Concepts Statement 8 56 Chapter 7: Presentation FASB Concept Statements are not authoritative. They establish concepts that the Board uses in developing standards for financial accounting and reporting. Exposure draft addresses matters relating to financial statement presentation. This Chapter would provide the Board with a framework for developing standards in meeting the objective of financial reporting that enhance the understandability of information to existing and potential investors, lenders, donors, and other resource providers of a reporting entity. Comments to the Board due by November 9, 2016 Exposed for Comment

57 Statutory Accounting Revisions Revisions Substantive

58 Statutory Accounting Revisions Revisions Non-Substantive SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures ( ) SSAP No. 26 Bonds ( ) SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities ( ) SSAP No. 92 Postretirement Benefits Other Than Pensions ( )

59 Statutory Accounting Revisions Revisions Substantive SSAP No. 41R Surplus Notes ( )

60 Statutory Accounting Revisions Revisions Non-Substantive SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures ( , , ) SSAP No. 26 Bonds ( , ) SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities ( , , )

61 Statutory Accounting Revisions 61 Pending / Exposed Substantive SSAP No. 2 Cash, Drafts, and Short-Term Investments ( ) SSAP No. 22 Leases ( ) SSAP No. 26 Bonds ( )

62 Statutory Accounting Revisions 62 Pending / Exposed Non-Substantive SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures ( ) SSAP No. 3 Accounting Changes and Corrections of Errors ( ) SSAP No. 26 Bonds ( )

63 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 63 Use of Insurance-Linked Securities ( ) Intent is to collect information regarding the use of insurance-linked securities by both insurers and reinsurers (e.g. cat bonds) Disclosure requirements for directly-written and assumed insurance risks: Number of outstanding ILS contracts Aggregate maximum proceeds that could be received as of the reporting date under the terms of the ILS Disclosure was required in 2015 in narrative form Actions: At Spring NM, exposed data-capture disclosure template with clarifying language on how to complete the disclosure. Non-Substantive 2015 Revision

64 SSAP No. 26 Bonds 64 Application of Yield-To-Worst ( ) Paragraph 6 states Bonds containing call provisions shall be amortized to the call or maturity value/date which produces the lowest asset value (yield-to-worst). New Paragraph 7 clarifies the application of the Yield-to-Worst concept and the amortization for callable bonds, including those with and without lock out periods. Does not apply to make-whole call provisions. Non-Substantive 2015 Revision

65 SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 65 Improved Consistency ( ) For non-insurance SCA entities, modifications to SSAP No. 97 clarify that equity shall be adjusted consistent with paragraph 16d of SSAP No. 25. For insurance SCA entities, modifications to SSAP No. 97 specify that either: Audited statutory equity of insurance SCA entities shall be adjusted to remove permitted or prescribed practices that depart from the NAIC AP&P Manual, or Audited statutory equity of insurance SCA entities with disclosure of any permitted or permitted practices and their affect on net income and surplus. Non-Substantive 2015 Revision

66 SSAP No. 92 Postretirement Benefits Other Than Pensions 66 Measurement Date ( ) New paragraph 64 of SSAP No. 92 require interim re-measurement of plan assets and benefit obligations only due to a significant event caused by the employer (such as a plan amendment, settlement, or curtailment). Does not eliminate the requirement for a year-end measurement of plan assets and benefit obligations. New paragraph 65 of SSAP No. 92 does not allow re-measurement of plan assets and actuarial present value of benefit obligations for other events NOT caused by the employer (such as changes in market prices or interest rates). Same changes made to SSAP No. 102 for Pensions (paragraphs 43 and 44). Non-Substantive 2015 Revision

67 SSAP No. 41R Surplus Notes 67 Clarification for Consistency ( ) Adopted 2016 Spring National Meeting Effective January 1, 2017 New SSAP No. 41R changes the measurement guidance of surplus notes. NAIC 1 and NAIC 2 = Amortized Cost All Other and Non-Rated = Lower of Amortized Cost or Fair Value Fluctuations in reported value reflected as unrealized gains/losses. Related Issue Paper No. 151 Valuation for Holders of Surplus Notes also adopted. Substantive 2016 Revision

68 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 68 Quarterly Reporting of Restricted Assets ( ) Quarterly general interrogatory for restricted assets was not as robust as the annual general interrogatory for restricted assets. Also, the disclosure requirement in SSAP No. 1 was only required for annual statements. Modifications now require the following in all interim statements if significant changes occur subsequent to the annual statement: Information on restricted assets information on admitted and nonadmitted restricted assets information on stock restrictions (which was provided in the annual statement general interrogatory). If significant changes occur during interim, the entire disclosure shall be reported in the interim statements. Non-Substantive 2016 Revision

69 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 69 Clarification of Permitted Practice Disclosure ( ) The NAIC AP&P Manual does not preempt state legislature and regulatory authority. Receiving information on permitted or prescribed practices allows for consistent assessments across insurers. Some have interpreted the disclosure requirement in SSAP No. 1 regarding disclosure of permitted and prescribed practices to apply only to impacts on surplus or RBC. Modification to SSAP No. 1 to ensure disclosure for all permitted and prescribed practices. Non-Substantive 2016 Revision

70 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 70 ILS Data Capture Disclosure ( ) Companion item to Item Exposed and adopted disclosure template in Note 1 to capture information regarding insurer use of ILS agreements. Disclosure includes maximum ILS proceeds. Number of ILS contracts, if known by the ceding/reporting entity. If the number of ILS contracts is not known, the ceding/reporting entity shall report the information known (such as whether there is one ILS contract, or more than one ILS contract, or that the number of ILS contracts is not known). Non-Substantive 2016 Revision

71 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 71 ILS Data Capture Disclosure Non-Substantive 2016 Revision

72 SSAP No. 26 Bonds 72 ETF Reporting in Investment Schedules ( ) Item originally included and exposed two options for reporting ETFs that trade similar to bonds: Option 1 New category / line number on Schedule D Part 1 Option 2 New schedule Schedule D Part 1, Section 1 Adopted Option 1 creates new category / line number on Schedule D for SVO- Designated Securities, which includes: ETFs Approved for Reporting as a Schedule D Bond (line number ) Class One Bond Mutual Funds Approved for Reporting as a Schedule D Bonds (line number ) Schedule D Part 1 includes new Subtotal line for SVO-Designated Securities (line number ) Non-Substantive 2016 Revision

73 SSAP No. 26 Bonds 73 Removal of Class 1 List from AP&P Manual ( ) Change in SEC regulations will result in institutional prime money market funds reporting floating net asset value instead of stable net asset values, making them ineligible for bond treatment. SSAP No. 26 Bonds, SSAP No. 30 Common Stock, and SSAP No. 32 Preferred Stock modified to reflect the removal of references to the Class 1 list. Adopted Item revises SSAP No. 2 Cash, Drafts, and Short-Term Investments so that all Money Markey Mutual Funds registered under the Investment Company Act of 1940 and regulated under rule 2a-7 of the Act are considered short-term investments and reported on Schedule DA. Non-Substantive 2016 Revision

74 SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 74 Inclusion of Filing Guidance ( and ) Disclosure details the reported value of the SCA and information received after filing the SCA with the NAIC (initially required at December 31, 2015). Item brings in, as an Appendix to SSAP No. 97, the filing guidance from the Purposes and Procedures Manual and modifies to remove conflicts with SSAP No. 97. Exposed changes at the Spring National Meeting and adopted at Summer National Meeting Data capture requirement Added ownership percentage of SCAs Instructions included Insurance SCAs (8.b.i entities) excluded Joint Ventures, Partnerships and LLCs are within scope of SSAP No. 48 and are excluded No exclusion for nonadmitted and/or immaterial SCAs Non-Substantive 2016 Revision

75 SSAP No. 97 Investments in Subsidiary, Controlled and Affiliated Entities 75 Explicitly Excluding ETFs from SCA Guidance ( ) Item clarifies that ownership of an ETF or a mutual fund does not reflect ownership in an underlying entity, regardless of the ownership percentage the reporting entity has of the ETF or mutual fund. Unless ownership of an ETF or a mutual fund actually results in control with the power to direct or cause the direction of management of an underlying company. Investments in ETFs and mutual funds are reported as either common stock, bonds, or preferred stock. Non-Substantive 2016 Revision

76 SSAP No. 2 Cash, Drafts, and Short- Term Investments 76 Classification of Money Market Mutual Funds as Cash Equivalents ( ) Current U.S. GAAP guidance (ASC ) specifies that MMMFs are cash equivalents. SAPWG is recommending the Capital Adequacy Task Force consider possibly reclassifying MMMFs as cash equivalents for RBC purposes. Exposed SSAP No. 2R along with related Issue Paper. Prospective application as of January 1, Discussion expected at the NAIC Fall National Meeting. Substantive 2016 Exposed/Pending

77 SSAP No. 22 Leases 77 ASU No ( ) Current guidance is that all leases shall be considered operating leases. SAPWG exposed for comments at the Spring National Meeting three proposed staff options for accounting for operating and financing leases under statutory accounting. Maintain existing statutory accounting guidance in SSAP No. 22, but with potential new disclosures Adopt ASU No with modification to recognize the lease asset and lease liability, but requiring nonadmittance of the lease asset Adopt ASU No with modification to recognize lease assets and lease liabilities for lessee s operating and financing leases. SAPWG elected to maintain current statutory accounting guidance for operating and financing leases. Discussion is expected during the NAIC Fall National Meeting. Substantive 2016 Exposed/Pending

78 SSAP No. 26 Bonds 78 Investment Classification Project ( ) Purpose review the investment SSAPs with suggestions to clarify definitions, scope, and the accounting method and related reporting Activity SAPWG directed NAIC staff to prepare an issue paper for bond-approved ETFs and bond mutual funds in the scope of SSAP No. 26 to require measurement at fair value unless the reporting entity elects to use domiciliary state approved document systemic value approach. Discussion expected during NAIC Fall National Meeting. Substantive 2016 Exposed/Pending

79 SSAP No. 1 Accounting Policies, Risks & Uncertainties, and Other Disclosures 79 Quarterly Reporting of Investment Schedules ( ) The SAPWG originally exposed for comment a proposal to possibly sponsor blanks revisions to incorporate the full investment schedules within all interim financial statements. Requested comments on what should be captured, and the form for those submissions considering cost and regulatory benefits. The SAPWG s latest exposure for comment is on a mid-year collection of Schedule D investment information to include CUSIP, par value, BACV, and fair value to be submitted electronic-only with the second quarterly statement. Discussion expected during the NAIC Fall National Meeting. Non-Substantive 2016 Exposed/Pending

80 SSAP No. 3 Accounting Changes and Corrections of Errors 80 Correction of an Error in SSAP No. 3 ( ) The SAPWG exposed for comment modifications to paragraphs 9 and 10 of SSAP No. 3 to clarify and distinguish errors from accounting errors and require statements be amended for a material accounting error unless otherwise directed by the domiciliary regulator. Correction of all accounting errors shall be reported as adjustments to unassigned funds (surplus) in the period an error is detected. Discussion is expected during the NAIC Fall National Meeting. Non-Substantive 2016 Exposed/Pending

81 SSAP No. 26 Bonds 81 Clarification of Investment Proceeds Disclosure ( ) Do disclosure requirements for annual audited financial statements in paragraphs 21e through 21g of SSAP No. 26 apply to only investments in the scope of SSAP No. 26, or are bonds in the scope of other SSAPs subject to the disclosure requirements (e.g. loan-backed and structure securities in the scope of SSAP No. 43R). Item exposed for comment specifies: The disclosure requirements in SSAP No. 26 apply to all investments included on Schedule D. The disclosure requirements in SSAP No. 26 apply to all bond investments included on Schedule DA (short-term) and Schedule E, Part 2 (cash equivalents). The disclosure requirement in SSAP No. 26, paragraph 26g (proceeds from sales and gross realized gains and gross realized losses) applies to proceeds from maturities, paydowns, and other redemptions. Modified language for SSAP No. 26, SSAP No. 2, and SSAP No. 43R to reflect these clarifications. Discussion is expected during the NAIC Fall National Meeting. Non-Substantive 2016 Exposed/Pending