Post on 01-Nov-2020
IASA Carolinas Summer Conference
US GAAP Update
Agenda
Introduction1. FASB Update2. Insurance – new guidance and changes on the horizon3. Leases – new guidance
Speakers Today
Chris Myers, Director
Atlanta, GA
Chris is a Director within PwC's Capital Markets & Accounting Advisory Services practice. He has over 11 years of experience in delivering audit and assurance services exclusively to life insurance clients, both public and private. Chris has acquired technical expertise in the areas of US GAAP, statutory, and US Securities and Exchange Commission reporting and internal control assessments. Chris also has experience in assisting insurance clients with becoming public companies including IFRS to GAAP conversions, IPO readiness assessments, and financial close process evaluations. He has also assisted clients with accounting advice regarding impact assessments for IASB/FASB convergence (e.g. Insurance Contracts), purchase accounting, and the evaluation of accounting for complex transactions.
Melissa Kehoe, Director
Charlotte, NC
Melissa is a Director within PwC’s Capital Markets & Accounting Advisory Services practice. She has nine years of experience at PwC providing assurance and advisory services to clients in multiple jurisdictions and across multiple industries, including industrial products, pharmaceutical, entertainment and media, retail and consumer and energy and utilities. Melissa’s experience includes working with PwC in Portland, Oregon and Sydney, Australia. Melissa is an accounting and financial reporting advisor on complex accounting transactions, specifically as it relates to hedge accounting, revenue recognition, leasing and business combinations under both US GAAP and IFRS. Melissa has also advised various clients with cross border transactions including initial public offerings, debt offerings, and acquisitions and accounting conversion projects from IFRS to US GAAP.
FASB Update
1
FASB PrioritiesAn active environment• Major projects
Complete remaining “convergence-era” projects in the first half of 2016 (Leases & Financial Instruments)
• Simplification initiative Reduce complexity in financial reporting in certain narrow areas
• New revenue standard Address implementation issues via the Transition Resource Group
• Current and future agenda Tackle current agenda efficiently and identify priorities for the future agenda
“Developing the right solutions means identifying the right problems.”
FASB Chairman, Russ Golden
Standards effective in 2016
Effective in 2016Consolidation – amendments to “VIE” and “Voting” models
Cloud computing - customer’s accounting
Measurement period adjustments – no longer pushed back to opening balance sheetGoing concern - management’s assessment and disclosures
Debt issuance costs – balance sheet classification as a reduction of debt vs. assetExtraordinary items – concept eliminated
Share-based payments – accounting for performance targets achievable after vestingInvestments measured at NAV – disclosure of FV information
Insurance – short-duration contract disclosure
Pension plans - measurement date expedient
Standards effective in 2017 or later
Effective in 2017 or later Effective date*
Early adoption
Inventory measurement – lower of cost and NRV 2017 Yes
Deferred income taxes – BS classification 2017 Yes
Equity method - simplifying transition 2017 Yes
Stock-based comp – various simplifications 2017 Yes
Derivatives – accounting for contract novations 2017 Yes
Derivatives - contingent put/call in debt instrument 2017 Yes
Revenue – new converged standard (amendments) 2018 2017**
Liabilities - breakage for stored-value cards 2018 Yes
Financial Instruments – Recognition & measurement 2018 No
Leases – new standard 2019 Yes
*For calendar year-end public entities **Early adoption can be no earlier than 2017
Current technical agenda - Active FASB projects
Project Impact Status
Financial Instruments—Impairment
• Shift from incurred loss model to an expected loss model for financial assets held at amortized cost
• Debt securities classified as AFS to follow a modified OTTI model
Final standard expected Q2 2016
Financial Instruments—Hedging
• Targeted amendments to several aspects of hedge accounting guidance
• Goal is to better align hedge accounting with risk management objectives and reduce complexity
Exposure draft expected in Q2 2016
Insurance • Enhanced disclosures for short-duration contracts
• Targeted changes for long-duration contracts
Short-duration: issued Q2 2015Long-duration: expected in 2016
Current technical agenda - Active FASB projects
Project Impact Status
Definition of a business
• Clarify distinction between a business and a group of assets and the accounting for the sale of nonfinancial assets
Various
Goodwill and intangibles
• Simplify accounting for goodwill and certain intangible assets for public business entities and not-for-profit entities
Various
Liabilities vs. equity –targeted improvements
• Improving and clarifying guidance related to financial instruments with characteristics of liabilities and equity
Exposure draft expected in 2016
Current technical agenda - Active FASB projects
Project Impact Status
Government grants • New disclosure requirements related to arrangements providing government assistance
Exposure draft re-deliberations
Financial statements for non-profit entities
• Significant changes to not-for-profit financial reporting model
Exposure draft re-deliberations
Disclosure framework
• Objective is to improve the effectiveness of footnote disclosures
• Addresses Board’s decision process, entities’ decision process and various topic-specific disclosures
Various
Conceptual framework
• Improved conceptual framework to use in developing future accounting standards
Initial deliberations
Simplification projects
Simplification initiativeFASB is focused on identifying areas of U.S. GAAP where it can reduce cost and complexity while maintaining or improving the usefulness of the information
Recently finalized and issued
• Extraordinary items• Debt issuance costs• Pension measurement date
• Inventory measurement• Measurement period adjustments• Deferred tax classification on balance
sheet• Transition to equity method
• Stock-based compensationOn the horizon• Income taxes – Exposure Draft (ED)
• Classification of debt
Private Company Council (PCC) overview
• Several private company accounting alternatives finalized in 2014
• More recently, PCC’s role has been moving closer to one of an advisory body for the FASB
PCC alternatives finalized•Goodwill•Hedge accounting•VIE – related party leasing•Intangible assets•Transition to PCC alternativesCurrent activities• Assisting FASB with
simplification projects• Advising FASB on other
projects• Partnership accounting
Insurance – new guidance and changes on the horizon
2
Insurance overview
Impacts• 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 2016- 2014-2016 deliberations: Potential targeted
accounting changes for long duration contracts; exposure draft possible in 2016
Enhanced disclosures for claim liabilities and targeted improvements to the accounting for long duration insurance contracts.
Improve and simplify the financial reporting requirements
Talking theory
Getting feedback
Coming soon
Short duration overview
Who is impacted?• Insurance entities that issue US GAAP financial statements, both public and
non-public entities.• With the exception of the claim liability rollforward guidance, the additional
disclosures pertain to short-duration insurance contracts only• Health insurance contracts:
◦ Historical average annual percentage payout is not required◦ IBNR+ is required in both interim and annual financial statements◦ Rollforward disclosure must be disaggregated
Short duration/claim liability enhanced disclosuresShort 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
Required disclosures – Incurred and paid claims development tables example
The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
Required disclosures – Incurred and paid claims development tables example (continued)
The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
Example – reconciliation of claims development tables to the claims liability
Excerpt from ASC 944-40-55-9E: copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.
Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claims Adjustment Expenses
De ce mbe r 31, 2016
Net Outstanding LiabilitiesHomeowners' InsuranceOther short-duration insurance lines
40,5501,976
$
Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526
Reinsurance recoverable on unpaid claimsHomeowners' InsuranceOther short-duration insurance lines
13,880283
Total reinsurance recoverable on unpaid claims 14,163
Insurance lines other than short-duration Unallocated claims adjustment expenses Other
3,3152,420
105,745
Total gross liability for unpaid claims and claim adjustment expense 62,434$
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 is 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.
Where to find additional information• US2015-10: FASB issues enhanced disclosure guidance for insurer claim liabilities
FASB targeted improvements – long durationProposed targeted improvements
• Annual (or more) updating of cash flow assumptions, with retrospective unlocking, for liability for future policy benefits
• Revised participating life model; future cash flows would include dividends
• Quarterly update of discount rate assumptions through OCI• Discount rate = rate of return on reference portfolio of
high-quality fixed income investments (proxy liability rate) vs. “expected investment yield” used today
• Simplified DAC amortization:• Based on insurance in-force, (or straight-line based on #
of contracts outstanding as practical expedient)• No interest accretion
• All GMXBs at fair value if other-than-nominal capital market risk; “own credit risk” adjustment through OCI
• Detailed rollforwards of disaggregated liabilities and DAC; qualitative and quantitative information about estimates
• Retrospective transition for liabilities; prospective for DACPwC
FASB may issue an ED in Q3 2016
We anticipate mixed reaction from constituents
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
• Issuance of the exposure draft is expected in the second half of 2016
Where to find additional informationPwC - FASB / IASB Insurance Contracts Project
Leases– new guidance
3
Overview of the New Lease Standard
• ScopeEmbedded leases
• LesseeRecognize right-of-use asset and lease liability for almost all lease contracts Exemption provided for short-term leases (12 months or less) for lessees
• LessorAccounting model stays substantially the same
• Effective January 1, 2019 for calendar-year public companies (2020 for non-public filers)
KEY CHANGESImprove and simplify the financial reporting for lessees
Create a model that provides a faithful representation of leasing transactions for both lessees and lessors
The new standard at a glance (lessee’s perspective)
Balance sheet• Virtually all leases coming on
balance sheet• Asset & obligation (similar to
today’s capital leases)
P&L• Dual recognition model for US
GAAP• Interest & amortization vs.
single lease expense
Disclosures• Enhanced qualitative &
quantitative disclosures required
Transition• Modified retrospective
approach required• Specified reliefs available
(must elect as package)
What are the main changes
An identified asset The right to control use of the asset during the term
Is explicitly or implicitly specified
Supplier has no practical ability to substitute or would not economically benefit from substituting
Decision-making authority over the use of the asset
The ability to obtain substantially all economic benefits from the use of the asset
Lease may be present in a contract if the contract includes both:
Identifying a lease
• Separate lease components from nonlease components• Allocate the consideration on a relative standalone basis• Increase the use of observable standalone prices• May elect not to separate the nonlease component for a given class of
underlying assets and account for the whole contract as a lease (accounting policy)
LESSEE
• Allocate the transaction price to separate performance obligations (aligned with the revenue standard)
LESSOR
Separating lease and non-lease components
Lessee Balance sheet Income statement Cash flow statement
Finance
Operating
Sales/Direct Financing
Operating
Lessor Balance sheet Income statement Cash flow statement
Right-of-useasset
Lease liability
Front loaded • Amortization expense• Interest expense
Lease expense
Interest = OperatingVariable = OperatingPrincipal = Financing
Operating
• Lease receivable • Unguaranteed
residual • Deferred
profit (DFL)• Underlying asset
remains
Front loaded• Interest income on
receivable and residual • Profit (immediate
or deferred)Lease income
Operating
Operating
Overview- How it works
If a lease meets any of the following 5 conditions, it may be a finance lease:
Transfer of ownership
Option to purchase is reasonably certain
Lease term is a “major part” of the economic life
Present value of lease payments is “substantially all” of the fair value
Specialized nature
Lease Classification
Summary of Lessee’s potential financial statement impact
Build-to-suit (BTS)• No more prescriptive BTS guidance• Transition guidance for existing failed
BTS transactions
Sale-leasebacks (SLB)• Use ASC 606 to determine whether sale
has occurred• No sale if leaseback classified as finance
lease• Symmetrical buyer-seller treatment
Lease modifications• Specific guidance for determining mod
vs. new lease • Guidance on how to account for mods
Combining contracts• Specified guidance for determining
when to combine contracts (similar to ASC 606)
Lease accounting overhaul- Other areas of impact
• Effective January 1, 2019 for calendar-year public companies• Other entities have an additional year for annual filings• Early adoption permitted
ADOPTION DATE
• Modified retrospective approach• May apply hindsight to existing leases to determine lease term and asset impairment • Change in classification (between operating and capital / finance)
TRANSITION METHOD
• At adoption do not reassess:- Whether an arrangement is, or contains, a lease- Lease classification- Whether initial direct costs would qualify for capitalization under the new standard
RELIEF PACKAGE
Effective date and transition
No need to reassess:
**These reliefs must be elected
as a package
• Whether expired or existing contracts contain a lease
• Classification of expired or existing leases• Amount of IDCs for existing leases
Can also elect to use hindsight when determining the following (with or without electing the package reliefs above):• Determining the lease term• Exercise / non-exercise of extension, termination, & purchase options
Lease accounting overhaul- Practical Expedients
2019201820172016
Comparative reporting periodsFinal
standardEffective
date
Current standardFinancialreporting:
New standard
Dual reporting (US GAAP)
Lease timeline
What are others thinking?
Overview of the survey:
• PwC and CBRE collected responses through an open, online survey between March and April of 2016.
• Responses from more than 500 executives responsible for lease accounting or lease management.
• More than 75% of respondents were CFOs, controllers or finance directors/managers.
• Responses across industries (see chart).
Potential impact and level of effort ahead:How significant is your lease portfolio?
• 40% lease >100 real estate assets 11% lease >1,000
• 64% lease >1 million square feet of real estate
• 56% own less than half of their real estate portfolio
• 54% lease >100 non-real estate assets 21% lease >1,000
• 69% have >75% of leases based in the US
Overview of the survey
Familiar with the standard? 21% indicated they are very familiar while 79% are either somewhat or not familiar with the new standard.
Ready, set, go on transition?Over 50% of respondents are still evaluating whether they will elect the transition provisions in the new standard.
Implementation challenges facing companies
Thank you
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