GAAP Accounting Update

Transcription

1 GAAP Accounting Update September 12, 2017 Alicia Spanburg Jeff Turner

2 Agenda GAAP Update 1. Insurance Contracts Long Duration Exposure Draft Short Duration Disclosures 2. Financial Instruments Recognition and Measurement Impairment 3. Revenue Recognition 4. Leases 5. Premium amortization on callable debt securities 6. Presentation of pension costs 2

3 On the horizon Insurance

4 Insurance overview Impacts Improve and simplify the financial reporting requirements FASB and IASB 2013 EDs had proposed fundamental changes to the accounting for insurance contracts In February 2014, the FASB changed course, toward making targeted improvements to insurer accounting/disclosures: - Q2 2015: ASU issued requiring additional disclosure for claim liabilities, effective deliberations: Proposed targeted accounting changes for long duration contracts; exposure draft issued in September 2016 Talking theory Getting feedback Coming soon Enhanced disclosures for claim liabilities and targeted improvements to the accounting for long duration insurance contracts. 4

5 FASB targeted improvements long duration contracts Proposed improvements: Responding to user requests to update assumptions, simplify, and improve consistency FASB proposed ED targeted improvements are pervasive Annual (or more frequent) updating of cash flow assumptions for liability for future policy benefits using retrospective method Quarterly update of discount rate assumptions through OCI High-quality fixed income instrument yield (proxy liability rate) vs. expected investment yield used today Simplified DAC amortization: Based on insurance in-force, or straight-line No interest accretion and no impairment test Variable product/separate account guarantees (GMXBs) with capital market risk at fair value; instrument-specific credit risk adjustment through OCI Detailed disaggregated rollforwards of liabilities and DAC; qualitative and quantitative information about estimates Retrospective transition for liabilities; prospective for DAC 5

6 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted Updating of cash flow assumptions Discount rates Annually (same time each year) or more frequently if actual experience or other evidence indicates need for revision Retrospective unlocking: Revised net premium ratio as of contract inception would be computed using actual historical experience and updated cash flow assumptions At-inception discount rate used for interest accretion expense and the revised net premium ratio No provision for adverse deviation Net premium ratio capped at 100%, replacing the premium deficiency test Liability cannot be less than zero Maintenance expenses are period costs High-qualityfixed-income instrument yield would: Replace expected investment yield and participating insurance contract rates for discounting purposes Maximize the use of relevant observable inputs and minimize the use of unobservable inputs Reflect the duration characteristics of the liability Traditional fixed longduration Limited-payment Participating insurance Traditional fixed longduration Limited-payment Participating insurance Portion of SOP 03-1 annuitization benefit Updating of discount rate Updated at each reporting period (e.g., quarterly) Change in liability due to discount rate changes would be excluded from income and recognized immediately in Other Comprehensive Income (OCI) The high-quality fixed-income instrument yield at the reporting date would be used to discount the present value of future benefits and future net premiums to derive the balance sheet policy benefit liability Traditional fixed longduration Limited-payment Participating insurance 6

7 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted DAC amortization and recoverability test Amortize on a ratable basis either: In proportion to the undiscounted amount of insurance in force over the expected term of the related contract On a straight-line basis, if the amount of insurance in force cannot be reasonably estimated Renewal commission wouldnot affect amortization before being incurred No interest accretion Experience adjustments recorded immediately through the statement of operations Assumption changes prospectively amortized No impairment test, by analogy to financial instrument accounting and debt issuance costs All long-duration contracts (except for investment contracts that use the effective yield method because they do not include significant surrender charges or do not otherwise yield significant revenues from sources other than interest). Sales inducement Follows new simplified DAC guidance Universal life asset and universal life unearned liability Certain investment contracts Business Currently unclear whether the DAC proposal will impact the Same scope as DAC combination contract intangible asset or other liability amortization and impairment test of these balances Net cost of Currently unclear whether the DAC proposal will impact the Same scope as DAC reinsurance (asset amortization of these costs or liability) 7

8 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted Market risk benefits Fair value measurement, with changes in fair value through statement of operations, except that changes to instrumentspecific credit risk would be recognized through OCI The guidance would apply to variable product guarantees of separate account or similar funds. Fair value measurement can be a liability or an asset. Certain non-traditional life and annuity contracts with GMDB, GMIB, GMAB, GMWB, or GMWBL Includes U.S. separate accounts and non U.S. segregated accounts meeting specified criteria Traditional Benefit ratio may not exceed 100%; immediate loss recognition Traditional universal life universal life to the extent the PV of expected excess payments exceed contracts and nonand non- expected assessments. traditional universal life traditional Ongoing assessment of profits followed by losses for the Certain investment universal life insurance benefit featurereplaces premium deficiency test contracts with additional (with additional Additional liability cannot be less than zero benefits liabilities for annuitization, death or other insurance benefits) 8

9 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted Presentation & disclosure (for annual and interim reporting periods) Disaggregated rollforwards for the liability for future policy benefits, policyholder account balances, market risk benefits, separate accounts, DAC, and sales inducements Disclosure of qualitative and quantitative information about objectives, policies, and processes for managing risks Liability for future policy benefits - Qualitative and quantitative discussion about adverse development Policyholder account balances Weighted-average earned and crediting rates; tabular presentation of account balances by range of guaranteed minimum crediting rates and the related range of the difference between rates being credited to policyholders and the respective guaranteed minimums Market risk benefits - Separate presentation of the carrying amount of the liability (or asset) and fair value changes in the statements of financial position and operations. Fair value changes attributable to a change in the instrument-specific credit risk would be reported in OCI. Various transition related disclosures, including disclosures for a change in accounting principle, on a disaggregated basis All long-duration contracts (except for investment contracts that follow financial instrument model/effective yield method) 9

10 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted Transition (at the beginning of the earliest period referred to as the transition date ) Liability for future policy benefits - Retrospective application at the transition date using the following approach, applicable for each level at which liabilities are calculated: Apply the guidance retrospectively as of the transition date using actual historical information If actual historical information covering the entire contract period is not available, use estimates of historical information derived from objective data (internal or external) If it is impracticable to apply the guidance retrospectively to all prior periods at the level at which liabilities are calculated, apply the guidance to in-force contracts on the basis of their existing carrying amounts at the transition date and using updated future assumptions, adjusted for the removal of any related amounts in AOCI. Opening retained earnings balance would be adjusted to the extent the net premium ratio exceeds 100% Market risk benefits Retrospective application of the fair value requirement at the transition date Cumulative effect of changes in the instrument-specific credit risk between contract issue date and transition date would be recognized in the opening balance of AOCI Remaining difference between fair value and carrying value at the transition date, excluding the effect of changes in the instrument-specific credit risk, would be recognized as an adjustment to opening retained earnings All long-duration contracts (except for investment contracts that follow financial instrument model/effective yield method) 10

11 FASB targeted improvements long duration Issue FASB tentative decision Contracts impacted Transition (at the beginning of the earliest period referred to as the transition date ) DAC (and other similar balances that are amortized on a basis consistent with the amortization of DAC) Prospective application at the transition date: Existing DAC (and similar balances) retained, except that AOCI relating to "shadow DAC" (and other similar balances) would be reversed and recorded as an adjustment to the DAC (and other similar balances) at the transition date Revised amortization method would be applied prospectively All long-duration contracts (except for investment contracts that follow financial instrument model/effective yield method) 11

12 What are the next steps Looking forward Given the significant nature of the proposed changes, the board decided that the proposed targeted changes would be exposed for public comment - FASB issued proposed ASU in September day comment period. Comments were due December 15, 2016,which included the following themes; Preparers favor a prospective approach for updating assumptions and discount rate higher than AA rate. Many preparers disagree with fair value for GMDBs Consensus for separate project on par contracts or provide scope out Supportive of simplified DAC amortization model - Public roundtable held in April

13 Short duration/claim liability enhanced disclosures Short duration contracts: Disaggregated claims development tables and related information, for most recent balance sheet, including: Tabular presentation of undiscounted, incurred and paid claims and allocated claim adjustment expenses by accident year, on a net basis, for up to 10 years; The sum of IBNR claims liabilities plus expected development on reported claims included within the incurred claims development tables, and a description of the estimation methodologies for these components; Cumulative claim frequency information for each accident year; and Reconciliation of the claims development tables to the balance sheet claim liabilities for the most recent balance sheet Historical average annual percentage payout of incurred claims (not required for health claims) Information regarding any loss reserves that have been discounted (carrying amount, discount amount, P/L interest accretion amount and line item classification) Significant changes in methodologies and assumptions Short and long duration contracts: Tabular interim (year to date) claim liability rollforward (disaggregated for health claims) in addition to currently required annual rollforward 13

14 Short duration disclosure observations from 2017 Analysis of 41 large public P&C company disclosures Number of years presented in the claims development tables. The ASU directs companies to provide claims development tables for the number of years for which claims incurred typically remain outstanding (that need not exceed 10 years). Where impracticable, the insurance entity need not disclose more than 5 years in the initial year of adoption. The table to the right presents the number of accident years presented in each of the 245 disaggregated claims development tables: Companies rationale for presenting fewer than 10 years. Approximately one-third of the companies presenting fewer than 10 years of data in the claims development tables cited the "impracticable" assertion as their rationale. In most other cases the company noted that the length of time reported represents the number of years for which claims incurred typically remain outstanding for the disaggregated group. No. of Years No. of Claims Development Tables % of Claims Development Tables % 9 7 3% 8 2 1% % 6 4 2% % 4 0 0% 3 3 1% 2 2 1% Total % 14

15 Short duration disclosure observations from 2017, Cont d. Analysis of 41 large public P&C company disclosures Number of P&C segments. The graph to the right shows the number of claims development tables presented compared to the number of the reporting segments for which the company provided at least one claims development table. Location of Required Supplementary Information (RSI) and narrative disclosures. The ASU noted that certain aspects of the disclosure, including the years presented in the claims development tables preceding the most recent reporting period and the average percentage payout of claims, should be considered supplementary information. The ASU did not prescribe a particular location for presenting supplementary information. In practice, companies included both the RSI and narrative disclosures in the Notes to the Financial Statements, although often in different sections. Most companies included the claims development tables in the Notes to the Financial Statement (typically within the Note related to Loss and Loss Adjustment Expense Reserves). Companies typically placed the disclosure regarding ASU within the section of the Notes to the Financial Statement covering Recently Issued Accounting Standards, often in Note 1. 15

16 Short duration disclosure observations from 2017, Cont d. Analysis of 41 large public P&C company disclosures Acquisitions. One of the more challenging implementation issues for companies creating the short duration contracts disclosures for the first time was how to reflect acquisitions within the claims development tables. During the several months leading up to the release of the disclosure, two common approaches emerged: prospective and retrospective. Companies using a prospective approach present the acquired business in the claims development tables beginning with the date of acquisition. Companies using a retrospective approach present the acquired business in the entire claims development tables - i.e., as if the business had always been owned. While many companies do not have significant acquisitions to disclose, affected companies include commentary in the disclosure narrative (generally as a prelude to the claims development tables), detailing the companies acquired, the timing of the acquisitions, and the presentation approach used in the claims development tables. Affected companies most frequently utilized a retrospective approach. For those several companies utilizing a prospective approach, unavailability of data at pre-acquisition evaluations or changes in claims handling practices or ceding arrangements was typically cited as a driver in choice of approach. Labeling of prior years. Almost all (39 of 41) companies disclosed within their reporting statement that the prior evaluation years in the claims development tables were unaudited. Most companies labeled the prior years unaudited as a part of the disclosure table headers. Many companies also included this fact within the accompanying narrative. 16

17 Short duration disclosure observations from 2017, Cont d. Analysis of 41 large public P&C company disclosures Companies with negative IBNR. Fifteen companies presented at least one claim development table with negative IBNR in at least one accident year. Nearly 80% of these individual years contain a very small amount of negative IBNR (less than $10 thousand). Five companies presented 11 claims development tables with at least one year with negative IBNR greater than $10 thousand. In general, instances of negative IBNR of more than $10 thousand are associated with business for which salvage and subrogation is prevalent, including: physical damage, homeowners and property. Reserve variability. We used the information presented in the new disclosures to compile cumulative reserve development, which measures the change in ultimate claim values that occurs as additional information regarding the claims and actual settlement activity becomes available. We reviewed trends in total and by several groupings to gain additional insights: By industry groupings, categorizing each company in our analysis into one of the following four groups: commercial lines focus large insurer ( large commercial ), commercial lines focus small insurer ( small commercial ), personal lines focus ( personal ), offshore insurance / reinsurance focus ( reinsurer ); By duration of exposure, categorizing each claims development table used in our analysis as either short tailed or long tailed; and By insurance or reinsurance business, categorizing each claims development table used in our analysis as insurance or reinsurance business. 17

18 Short duration disclosure observations from 2017, Cont d. Analysis of 41 large public P&C company disclosures The table below shows how loss reserves have developed since the initial year-end balance sheet date through year ending 2016 for the various groupings. Green denotes favorable development and red denotes adverse development. 18

19 Short duration disclosure observations from 2017, Cont d. Analysis of 41 large public P&C company disclosures The table below shows how accident year loss reserves have developed since the original year-end balance sheet date through year-end Green denotes favorable development and red denotes adverse development. 19

20 When is it effective? Adoption Effective date for public business entities: annual reporting periods beginning after December 15, 2015 (i.e., year end 2016 for calendar year entities), and interim reporting periods thereafter. Non-public business entities: one year deferral (i.e., 2017 for calendar year end entities). Early application was permitted. Transition Upon transition, the claims development table need not exceed five years if presenting prior years information is deemed impractical. An additional year should be added to the disclosure in each subsequent year of financial reporting, but need not exceed 10 years. 20

21 Navigating the new landscape Financial instruments (recognition and measurement)

22 Recognition and measurement overview Issued January 2016 Impacts Equity investments: - FV-NI - Measurement alternative available for certain equity securities within the scope of the new standard - Single step impairment model for equi securities under the measurement alternative Financial liabilities under FVO: - Changes in fair value due to instrument specific credit risk recognized in OCI Loans, debt securities, and financial liabilities (other than FVO) largely unchanged ty Reduces complexity in accounting for financial instruments Provides users decisionuseful information about financial instruments Affects public and private companies that hold financial assets or owe financial liabilities 22

23 What is affected Mostly impacts investments in equity investments and financial liabilities under the fair value option Financial instruments expected to be impacted Equity investments Financial liabilities under the FVO Presentation and certain disclosures will be impacted Financial instruments not expected to be impacted Loans Debt securities Financial liabilities not under the FVO Consolidated equity investments Equity method investments 23

24 Presentation and disclosure incremental disclosures Disclosure of financial instruments Financial instruments at amortized cost Requires disclosure of financial assets and financial liabilities separately, grouped by measurement category (e.g., FV, amortized cost, LOCOM) and class of financial asset (e.g., loans, securities) Requires public business entities to report (parenthetically in the statement of financial position or in the notes to the financial statements) all fair values of financial instruments measured at amortized cost based on an exit price, eliminating the ability to use an entry price for certain fair value disclosures (e.g. loans)* Non-public business entities exempt from disclosing fair value of financial instruments measured at amortized cost in the financial statements (previously disclosed in accordance with ASC ) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value for disclosure purposes of financial instruments measured at amortized cost Public business entities to disclose the fair value hierarchy level within which the fair value measurement is categorized for each interim and annual period *does not apply todemand deposit liabilities or receivables/payables due in less than one year 24

25 Presentation and disclosure incremental disclosures (continued) Equity investments without readily determinable FVs Disclose: The carrying value of investments without readily determinable fair values measured using the measurement alternative The total amount of adjustments resulting from impairment Total amount of adjustments for observable prices 25

26 What are the next steps Looking forward Effective dates: Public business entities - annual periods (and interim periods within those annual periods) beginning after December 15, All other entities annual periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, Early adoption: All entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from changes in instrument-specific credit risk in other comprehensive income. Non-PBEs can early adopt the provision permitting the omission of fair value disclosures for financial instruments reported at amortized cost. Early adoption of these provisions can be elected for all financial statements of fiscal years and interim periods that have not yet been issued or that have not yet been made available for issuance. Where to find additional information In depth US , New guidance on recognition and measurement to impact financial instruments Guide: Loans and investments 26

27 Navigating the new landscape Financial instruments - Impairment

28 Impairment overview Impacts Changes determination of losses from incurred loss approach to expected loss approach and replaces multiple impairment models Could impact regulatory capital requirements, key financial metrics Convergence will not be achieved FASB - Single measurement lifetime losses at inception except for available for sale debt securities Current incurred loss model criticized for delaying timely loss recognition Model based on an expected loss approach Recognize losses on a more timely basis 28

29 What s in scope of CECL? CECL applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures Scope of the standard Loans Held to maturity debt securities Loan commitments Trade receivables Lease receivables Reinsurance receivables Financial guarantees Purchasedcredit deteriorated assets recorded at amortized cost Specifically excluded Loan receivables held for sale Financial assets where fair value option is elected Equity instruments and equity method investments Derivatives Related party loans to entities under common control 29

30 How does it work Overview of the CECL model Current Expected Credit Loss model (CECL) Single measurement objective for assets held at amortized cost: Expected credit losses over the life of the financial asset No triggers before recognizing impairment CECL reserves are the amount not expected to be collected The allowance is a valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected 30

31 How does it work CECL measurement principles Financial assets within scope must be pooled when similar risk characteristics exist; otherwise assessed individually Use of a discounted cash flow model is not required The allowance should be calculated based on the amortized cost basis of the financial asset Consider relevant internal and external information, including: o Historical experience o Current conditions o Reasonable and supportable forecasts Future periods beyond which the entity is able to make a reasonable and supportable forecast reversion to historical loss information 31

32 How does it work Time horizon for measurement of CECL Estimate of expected credit losses = amount that an entity does not expect to collect over the life of the asset Life of the asset considers the contractual term and expected prepayments but not renewals, modifications or extensions, unless a Troubled Debt Restructuring is reasonably expected Off-balance-sheet credit exposures: o Consider the period over which the commitment is legally binding o Do not consider obligations that are unconditionally cancellable at the lender s discretion Financial guarantees will have allowances similar to an unfunded commitment 32

33 How does it work CECL measurement Other key considerations Consideration of collateral Mitigation of credit risk Measurement when foreclosure is probable Collateral dependent financial assets Impact of embedded vs freestanding credit enhancements Other allowance considerations: Trade receivables Lease receivables 33

34 Key differences from Incurred losses for loans Today ASC 450 (FAS 5) for incurred losses in the loan portfolio (collectively evaluated for impairment) ASC 310 (FAS 114) specific valuation allowances Some of the key changes Replace incurred loss model with expected loss model Use reasonable and supportable forecasts Reflects contractual life considering prepayments, but without consideration of renewals, extensions, or modifications, unless TDR is reasonably expected No threshold for identification of individually impaired loans Measurement approach is similar to today if elect to use discounted cash flow modelling approach Continues to maintain practical expedient for collateral dependent loans ASC TDRs Measured using the CECL model Recognize credit losses, including certain concessions ASC PurchaseCredit Impaired Purchasedwith more than insignificant credit deterioration (PCD) Basis grossed up to reflect expected loss estimate Initial credit loss will not be recognized in income Changes in allowance recognized immediately in income Follow an accrete to contractual interestmodel Under the new standard, assets with similar risk characteristics shall be collectively assessed for expected credit losses. 34

35 How does it work Purchased financial assets with credit deterioration (PCD)* Scope: Assets with more than insignificant deterioration in credit quality since origination Basis grossed up to reflect expected loss estimate on Day 1 Initial credit loss not recognized in income If a discounted cash flow (DCF) model is used: Step 1: Calculate the effective interest rate (EIR) by solving for the discount rate such that discounted expected cash flows equal the purchase price Step 2: Calculate the initial allowance by discounting the cashflows not expected to be collected (i.e., difference between contractual and expected cashflows) by the EIR If a non-dcf model is used, the Day 1 allowance is based on par ** Subsequently apply CECL and accrete to contractual interest models *The PCD model is applicable to AFS debt securities and assets within scope of CECL **Not applicable to AFS debt securities 35

36 New disclosure requirements Allowance for credit loss roll forward schedule Credit quality indicators (CQI) The current disclosure requirements in ASC 310 Receivables, to disclose the rollforward of the allowance for credit loss accounts for receivables will be extended to all financial assets in scope of the new standard, including AFS debt securities The current disclosure requirements related to credit quality indicators for receivables will now be extended to other in scope financial instruments, including held to maturity securities This requirement will not be applicable to AFS debt securities or short term trade receivables The disclosure is incremental to the current required disclosure for receivables; it will require the current disclosure of CQI s by class of financial asset, but will also require expansion of the disclosure to be by vintage, or year of financial asset origination The new standard: Exempts non-public business entities from the CQI disclosures, and Provide transition relief for public business entities ( PBEs ) that are non-sec Filers: On the initial date of adoption, preparers would only need to disclose the most recent three years of vintage CQI data. Each fiscal year thereafter, an incremental year of vintage CQI data should be disclosed until five separate fiscal years are disclosed. Does not provide transition relief or exemptions for PBEs that are SEC-Filers. 36

37 Transition guidance Generally, cumulative transition adjustment will be required on the date of adoption Purchased financial assets with credit deterioration Current PCI financial assets will be classified as PCD at transition PCD guidance will be applied prospectively for financial assets that previously applied the purchased credit impaired (PCI) model At date of adoption, record allowance for credit loss gross-up to the balance sheet Debt instruments that experienced other-than-temporary-impairment Adopt ASU prospectively 37

38 What are the next steps Looking forward The effective date for the impairment standard is: PBEs that meet the definition of an SEC filer in fiscal years beginning after December 15, 2019 including interim periods within those fiscal years; PBEs that do not meet the definition of an SEC filer in fiscal years beginning after December 15, 2020 including interim periods within those fiscal years; and Non-PBEs (including certain not-for-profit entities and employee benefit plans) in fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, Early application of the guidance will be permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. IFRS 9: Issued and effective for annual periods beginning on or after January 1, 2018 A transition resource group (TRG) has been created (similar to TRG for revenue standard). 38

39 Navigating the new landscape Revenue from contracts with customers

40 Revenue recognition overview Issued May 2014 Impacts Standard could significantly change how many entities recognize revenue Standard is intended to be principlesbased Will remove existing industry-specific guidance Expanded qualitative and quantitative disclosures (annual and interim) Transition Resource Group Achieve a single, comprehensive revenue recognition model Core principle is that revenue recognition depicts transfer of control to customer in an amount that reflects consideration to which an entity expects to be entitled 40

41 Who is affected Scope set to improve consistency and comparability within industries, across industries, and across capital markets Scope of the standard Contracts with customers of all entities and industries within scope with only certain transactions excluded Specifically excluded Lease contracts Insurance contracts Financial instruments Guarantees (other than product warranties) Certain nonmonetary exchanges Contracts with other than customers (e.g., collaborations) 41

42 When is it effective Effective Date Early adoption permitted? Method of adoption U.S. GAAP Public Beginning after December 15, calendar year Yes No earlier than the original effective date for public entities 2017 calendar year U.S. GAAP Non-public Beginning after December 15, calendar year Yes No earlier than the original effective date for public entities 2017 calendar year IFRS Beginning on January 1, calendar year Retrospective (with certain practical expedients allowed) or modified retrospective Yes 42

43 AICPA TaskForce Topics: Insurance Some potential services and related issues included: P&C insurance High deductible policies (ASC 606/944 split or all insurance?) Mortgage insurance Out of scope of ASC 606? Health insurance Administrative service only (ASO) contracts ASO with aggregate stop loss coverage (ASC 606/944 split or all insurance?) Life insurance Investment contracts - Explicit fees for asset management service: financial instrument accounting or U/L model? 43

44 FASB Issued Technical Corrections and Improvements for Insurance Scope of Revenue Recognition FASB issued a technical correction to clarify that contracts within scope of Topic 944 are excluded from scope of Topic Includes life and health, property casualty, and mortgage guaranty insurance - Investment contracts (accounted for as a financial instrument ) - Non-insurance contracts written by an insurance entity are accounted for under ASC 606 Bifurcating elements of an insurance contract Wording added to Basis for Conclusion; - Insurance mitigation or cost containment activities (such as claims handling/process) are part of fulling the insurance obligation or mitigating insurance risk - Totally non-insurance related activities added to an insurance contract (anti-abuse provision) Apply combination of contracts guidance (ASO and Stop Loss) AICPA proposed clarification; - Evaluate contract economics and nature of arrangements (including pricing interdependencies) to assess if contracts should be combined for accounting performance (assessing performance obligations) 44

45 Navigating the new landscape Leases Leases

46 Leases executive summary Issued February 2016 What you need to know Virtually all leases on balance sheet Renewal options will be included when a significant economic incentive to exercise exists FASB and IASB diverged on lessee pattern of income statement recognition FASB similar to today operating lease expense on a straight-line basis IASB all financing, therefore front loaded expense Lessors in a sales-type or direct financing lease derecognize the underlying asset and recognize a lease receivable and unguaranteed residual asset Impacts Balance sheet will be grossed up for lessees Financial metrics and debt covenants may be impacted Leases may be embedded in other contracts and will now be on balance sheet Looking forward Effective CY 2019 for public business entities (including interim periods Q1 2019) Effective CY 2020 for nonpublic entities 46

47 On the horizon Premium amortization on callable debt securities

48 Premium amortization on callable debt securities Issued April 2017 What you need to know Premiums on callable debt securities to be amortized to the earliest call date Current GAAP for non investment companies is to amortize premiums over the contractual life of the security. If an issuer exercises the call feature it typically results in loss of unamortized premium. FASB goal to better align interest income recognition with the manner in which market participants price these instruments. Applicable to all entities that purchase callable debt securities. Scope of guidance are those with explicit, noncontingent call features callable at fixed prices on preset dates. Insurance Impacts Currently there is a statutory to GAAP difference for treatment of amortization. Statutory amortizes premium on a yieldto-worst basis New guidance will likely result in a smaller difference to GAAP Looking forward Effective CY 2019 for public business entities (including interim periods Q1 2019) Effective CY 2020 for other entities Early adoption permitted Transition- Modified retrospective 48

49 Navigating the new landscape Development Stage Entities Presentation of pension cost

50 Presentation of pension cost Issued March 2017 What you need to know Service cost to be presented with other employee compensation costs within operations, if such a subtotal is presented, Other components of net benefit cost reported separately outside of income from operations (in one or more line items), if such a subtotal is presented, and Capitalize only the service cost component, when applicable. Insurance Impacts Present other components in separate line item or adequately disclose where the costs are included For establishing deferred acquisition costs or loan origination costs, limit costs to service component only Looking forward Effective CY 2018 for public business entities (other entities should adopt a year later) Retrospective transition for presentation and prospective for capitalization 50

51 Where to find additional information FASB/IASB Insurance Contracts Project Insurance Alert: FASB Roundtable on Insurance Contracts April 19, 2017 Insurance Alert: FASB Meeting on Insurance Contracts February 8, 2017 In Depth: FASB Issues Enhanced Disclosure Guidance for Insurer Claim Liabilities In Depth: New Guidance on Recognition and Measurement to Impact Financial Instruments Loan & Investments Guide In Depth: The FASB s New Financial Instruments Impairment Model In Brief: Allowance for Loan and Lease Losses FASB Issues Final Impairment Standard FASB: ASU Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers &acceptedDisclaimer=true 51

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