Session 15PD: GAAP Hot Topics. Moderator: Presenters: Anne Potas

Transcription

1 Session 15PD: GAAP Hot Topics Moderator: Presenters: Anne Potas SOA Antitrust Disclaimer SOA Presentation Disclaimer

2 Hot topics in GAAP reporting Anne Potas 28 August 2017

3 Disclaimer The material contained herein is for discussion purposes only. The material is intended to be used to illustrate points raised in a verbal presentation and should not be used outside of that context or on a stand-alone basis. Nothing contained within this material, or within the accompanying verbal presentation, should be interpreted as constituting accounting advice. Page 1

4 Today s agenda US GAAP accounting change timeline Classification and measurement Credit losses Revenue recognition Other GAAP developments Page 2

5 US GAAP accounting change timeline Shortduration disclosures Effective Revenue recognition Transition Effective Classification & measurement Transition Effective Leases Transition Effective Impairment Implementation Transition Effective Longduration Exposure draft deliberations Q Transition (determined by final Standard) Potential effective date Page 3

6 Classification and measurement Accounting Standards Update (ASU) Page 4

7 Classification and measurement Overview The standard makes targeted amendments to existing US generally accepted accounting principles (GAAP). What s changing? Equity investments will generally be measured at fair value (FV) with changes in FV reported in net income (FV-NI). Measurement alternative will be available for equity investments (Including certain forward contracts and purchased options) that don't have readily determinable fair values and don't qualify for the net asset value practical expedient in Accounting Standards Codification (ASC) 820. Changes in instrument-specific credit risk will be recognized in other comprehensive income (OCI) for financial liabilities measured under the fair value option (FVO). Realizability of deferred tax assets (DTA) related to available-for-sale (AFS) debt securities will be assessed in combination with other DTAs. Public Business Entities (PBEs) will make fewer FV disclosures; non-pbes won t disclose FV of financial instruments measured at amortized cost. Page 5

8 Classification and measurement Effective date and transition Effective dates for calendar-year entities will be as follows: PBEs: Annual and interim periods in 2018 Other entities: Annual periods in 2019 and interim periods beginning in 2020, but early adoption in 2018 is allowed Early adoption of the following provisions is permitted: Recognition in OCI of change in FV due to change in own credit risk for financial liabilities measured using the FVO Elimination of fair value disclosures for financial instruments not measured at FV (non-pbes only) Cumulative-effect adjustment to retained earnings, except the following: Amendments related to equity investments without readily determinable fair values applied prospectively Page 6

9 Credit losses ASU Page 7

10 Credit losses Scope Entities are required to use the following three models: 1. Current expected credit loss (CECL) model (ASC ) Financial assets measured at amortized cost, including receivables (trade, reinsurance and other), contract assets, held to maturity (HTM) debt securities and loans Net investments in leases recognized by a lessor Off-balance-sheet credit exposures not accounted for as insurance 2. AFS debt security impairment model (ASC ) AFS debt securities 3. Model for certain beneficial interests (ASC ) classified as HTM or AFS that are not of high credit quality New day-one accounting for initial recognition of purchased financial assets with credit deterioration (PCD assets) Record as the initial amortized cost the sum of (1) the purchase price and (2) the estimate of credit losses as of the date of acquisition Thereafter, account for PCD assets using the models listed above Existing loss contingency model in ASC will apply to instruments outside the scope of these models Page 8

11 Credit losses Current expected credit loss model overview Objective Recognize an allowance for credit losses that results in the financial statements reflecting the net amount expected to be collected from the financial asset Core concepts Based on an asset s amortized cost Reflect losses over an asset s contractual life Consider available relevant information Reflect the risk of loss Page 9

12 Credit losses AFS debt security impairment model decision tree 1. Is the fair value below amortized cost? Yes 2. Does the entity intend to sell the security? 3. Is it more likely than not the entity will be required to sell the security before it recovers in value? No 4. Is a portion of the unrealized loss a result of a credit loss? No Yes No Yes Yes Recognize impairment loss in earnings by writing down the security s amortized cost basis to FV Credit loss recognized in earnings by recording an allowance for credit losses Loss related to other factors continues to be recognized in OCI An entity may not use the length of time a security has been in an unrealized loss position as a factor, by itself or in combination with others, to conclude on whether a credit loss exists. Page 10

13 Credit losses Effective date and transition Effective date for calendar-year companies PBEs that are SEC filers Other PBEs All other entities Early adoption? 2020 and interim periods within and interim periods within and interim periods in 2022 Yes, but no earlier than 2019 An entity will apply the new guidance using a modified retrospective approach. Recognize a cumulative-effect adjustment as of the beginning of the first reporting period in which the guidance is effective Transition relief is provided for the following: Purchased financial assets currently accounted for under ASC Debt securities for which an other-than-temporary impairment has already been recognized The credit quality indicator disclosures by year of the asset s origination Page 11

14 Revenue recognition Page 12

15 Revenue recognition Overview The new revenue recognition standard replaces nearly all existing US GAAP guidance on revenue recognition. We don t anticipate further significant changes to the recognition and measurement principles in the standard, so insurance entities should focus on implementation. The effective date is fast approaching. Annual periods after 15 December 2016 Annual periods after 15 December 2017 Annual periods after 15 December 2018 Early adoption for all entities Mandatory adoption for public entities Mandatory adoption for nonpublic entities Page 13

16 Revenue recognition Summary of the model Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Step 1 Identify the contract(s) with a customer Step 2 Identify the performance obligations in the contract Step 3 Step 4 Step 5 Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when (or as) each performance obligation is satisfied Page 14

17 Revenue recognition Scope contracts written by insurance entities All contracts within the scope of ASC 944, including insurance and investment contracts, are not within the scope of ASC 606, Revenue from Contracts with Customers. Assess whether an entire contract is within the scope of ASC 944, and therefore not within the scope of ASC 606: Promises in a contract that are provided to help fulfill the contract within the scope of ASC 944 should be accounted for under ASC 944. The assessment of whether a contract and its components are within the scope of ASC 606 or ASC 944 is similar to the assessment of whether the contract and its components are within the scope of ASC 605 or ASC 944 under legacy guidance. Page 15

18 Revenue recognition Scope contracts written by insurance entities Example of contracts within the scope of ASC 606 Third-party administrator Claims processing and administration services Property appraisal services Information risk management services Managed care (administrative services only) Enrollment and member services Claim payment adjustment and recovery services Subrogation services Asset management Trading and administration services Investment management services Business and corporate development services Insurance and reinsurance brokerage Brokerage arrangements Agency arrangements Advisory arrangements Note: While the above are typical revenue streams considered in-scope for insurance entities, the list is not all inclusive. All revenue streams need to be analyzed to determine whether they are in-scope. Page 16

19 Other GAAP developments Page 17

20 Other GAAP developments ASU , Simplifying the Test for Goodwill Impairment ASU , Premium Amortization on Purchased Callable Debt Securities Page 18

21 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com