Investment Accounting and Reporting - IASA 2015/Sessions...changes will impact your investment...
Transcript of Investment Accounting and Reporting - IASA 2015/Sessions...changes will impact your investment...
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Investment Accounting and Reporting Updates
Session 103
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Learning Objectives
1. Review recent guidance updates and how these
changes will impact your investment reporting
2. Address current regulatory topics being
discussed that relate to investment accounting
3. Provide a guideline for best practices to ensure
that you keep current with changes in accounting
guidance
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Presenters
Tip Tipton, CPA, CGMA
Financial Analyst, Accounting Policy
Thrivent Financial
• Coordinates GAAP and SAP accounting
implementations
• Analyzes reporting processes for efficiency
and improvement
• Maintains accounting policy library
• Over 20 years experience with investment
accounting and reporting
• IASA National and Chapter volunteer
• ACLI Accounting Committee member
Zach Brown, CPA
Insurance Services Product Owner
Clearwater Analytics
• Manages cross-functional product
enhancement teams
• Liaison between internal and external
stakeholders
• Communicates product benefits and
features
• Market expert for product implementation
of new asset classes
• Regulatory accounting and reporting
expert
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Survey Results
ACCOUNTING BASES
REPORTED ON
What Is The Total Size Of Your
Organization’s Investment Portfolio?
[PERCENTAGE
]
[PERCENTAGE
]
7% 14%
7%
[PERCENTAGE
]
$0 to $100M
$100M+ to $500M
$1B+ to $5B
$10B+ to $20B
$20B+ to $50B
$50B+
58%
37%
5%
SAP
US GAAP
IFRS
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Survey Results
What Specific NAIC Investment Accounting And Reporting Issues Is Your
Company Concerned With Over The Next Year? (Check all that apply.)
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Survey Results
What Specific FASB Investment Accounting And Reporting Issues Is Your
Company Concerned With Over The Next Year? (Check all that apply.)
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Agenda
1. NAIC Updates
2. FASB Updates
3. Other
4. Best Practices
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC Updates
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Investment Risk-Based Capital Working Group
WHAT
• Revise the RBC treatment of cash collateral for derivative transactions.
WHY
• The cash collateral would be separated from the ‘all other’ category for AVR and RBC,
and provided with factors more appropriate to the risk.
TAKEAWAYS
• Risk factors decrease from 1.3% to 0.4% for derivatives collateral pledged
• Changes effective for the 2015 RBC calculation
• Corresponding changes to AVR will be made in 2016
RBC for Cash Collateral for Derivative Transactions – Adopted
CATF 2014-32-I – effective 12/31/2015
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Investment Risk-Based Capital Working Group
Commercial Mortgage Loans – Discussed
• Reviewing the risk factors for commercial mortgage loans that were
adopted in 2013 (RBC) and 2014 (AVR) for possible changes
• Need to have bond factors finalized before changes are reviewed
Real Estate – Discussed
• Reviewing proposed changes to the risk factors for real estate that
would reduce the RBC risk factor from 15% to 8.5%
• Expected to be addressed during the Summer National Meeting
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Investment Risk-Based Capital Working Group
Base Risk Factors for Corporate Bonds - Discussed
Moody's
Ratings Current Propoosed Current Propoosed
Aaa 1 1 0.40 0.38
Aa1 1 1 0.40 0.38
Aa2 1 2 0.40 0.61
Aa3 1 2 0.40 0.61
A1 1 3 0.40 1.13
A2 1 3 0.40 1.13
A3 1 3 0.40 1.13
Baa1 2 4 1.30 1.66
Baa2 2 5 1.30 2.06
Baa3 2 6 1.30 2.75
Ba1 3 7 4.60 3.22
Ba2 3 8 4.60 4.09
Ba3 3 9 4.60 5.69
B1 4 10 10.00 6.23
B2 4 11 10.00 8.57
B3 4 12 10.00 11.48
Caa 1, 2, 3 5 13 23.00 18.66
NAIC Designation C1 Factor (%)WHAT
• Increase the granularity of designations
• Proposal to move from 6 to 14 designations
WHY
• More precise credit quality designations
TAKEAWAYS
• Begin evaluating potential impact to RBC
• Implementation challenges
• Change in investment strategy
• Formal proposal at Summer NAIC Meeting
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Capital Adequacy Task Force
The proposed 2015 RBC factors for Broker’s Receivables (2015-09-CA)
Broker Receivables - Proposed
2014 2015
Life / Fraternal 1.4 % 1.4 %
Property / Casualty 2.4 % 2.7 %
Health 2.4 % 2.6 %
Restricted Asset RBC Charge for Assets on Deposit with
State - Discussed • Discuss the possibility of reducing the RBC charge for assets held on deposit with the
state for the benefit of all policyholders
• The additional risk charge is 1.3% in addition to the standard risk charge for the type of
investment (e.g. mostly bonds)
NAIC - Blanks Working Group
WHAT
• Add 2 footnote lines to Schedule DB-D-
1 to report the amount of offset
• Add a crosscheck to the instructions
• Add a reference for the illustration for
Note 5J to tie to Schedule DB-D-1
WHY
• Blanks pages will reflect changes to
SSAP No. 86 adopted by SAPWG
TAKEAWAYS
• Make sure the derivatives lines on the
asset and liability pages tie to the
respective amount reported in Schedule
DB-D-1
• Per the Investment Reporting Subgroup
issues list, discuss an update to the
instructions for Schedule DB-D-1 to
better clarify reporting of exchange
traded derivatives and central
clearinghouse derivatives
Schedule DB-D-1 Crosscheck and Disclosure – Adopted
2014-17BWG – effective 01/01/2015
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Blanks Working Group
WHAT
• Modify the instructions and illustrations for Notes 32 (Analysis of Annuity Actuarial
Reserves and Deposit Type Liabilities by Withdrawal Characteristics) and 34 (Separate
Accounts)
WHY
• To modify Notes 32 and 34 to correct inconsistencies between SSAP No. 56 (Separate
Accounts) language and the instructions regarding the use of market value and fair
value.
TAKEAWAYS
• The modification is a simple clarifying change.
• Effective 12/31/15
Notes 32 and 34 Instructions – Adopted
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Modification of the instructions for CUSIP and Description.
• Adding new electronic only columns for Issuer, Issue, SEDOL
Code, ISIN Code, and Capital Structure Code.
WHY
• The SVO is attempting to reduce the number of Jump Start
Report exceptions based on unidentified securities.
• This will also assist the SVO in identifying securities in the feeds
and improve their ability to provide information to regulators.
NAIC - Blanks Working Group
Identifier Challenges – 2015-14BWG
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
• New fields may require new data feeds or data contracts
• Descriptions should match Issue “where appropriate”
• Issuer and Issue field – Guidance states that the reporting entity
is “encouraged” to use a set of specific sources
• SEDOL – Likely already have, there may be data usage rights
issues
• ISIN – Likely already have, there may be data usage rights
issues
Identifier Challenges – 2015-14BWG, cont.
NAIC - Blanks Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
Capital Structure – This is the one data point that may require
additional review as not all insurers are bringing in the relevant data to
calculate this code
1. Senior Secured Debt
2. Senior Unsecured Debt
3. Senior Subordinated Debt
4. Junior Subordinated Debt
5. Other
Identifier Challenges – 2015-14BWG, cont.
NAIC - Blanks Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Inconsistencies in the way insurers fill out the D, part 1, is
making it difficult for regulators to aggregate security exposure
• The NAIC is considering mandating how this field is filled out to
help add clarity and consistency
WHY
• Regulators use this column to determine exposure to issuers,
markets, and security modeling types. Consistency is vital.
NAIC - Investment Reporting Subgroup
Security Description
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
PROJECT STATUS
• While the proposal will recommend using an automated source, it will not
be a requirement.
• Populating the field with the ticker (symbol) is not desired.
• The proposed recommended data sources for the description:
• Bloomberg
• Interactive Data Corporation (IDC)
• Thomson Reuters
• S&P/CUSIP
• Descriptions used in either the relevant SEC filing or legal documentation
for the transaction.
NAIC - Investment Reporting Subgroup
Security Description, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
•There is currently no uniformity between data providers
•Additional Data costs should be reviewed
• New Contracts
• New Development costs
•This will be superseded by the Identifier challenges
NAIC - Investment Reporting Subgroup
Security Description, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Reviewing the categorization on the Schedule BA (Other Long-Term
Assets)
WHY
• BA categories have grown throughout the years and it is uncertain if
the current level of detail is required for reporting
NAIC - Investment Reporting Subgroup
BA Categories
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
PROJECT STATUS
• Last BA proposal was to reduce, from over 20, to nine
categories:
1. Mortgage Loans
2. Other Fixed Income or Variable Interest Rate Instruments
3. Real Estate
4. Capital Notes, Surplus, etc.
5. Collateral Loans
6. Non-Collateral Loans
7. Low Income Housing Tax Credit
8. Working Capital Finance Investment
9. Any Other Class of Assets
• Put on hold after industry expressed concerns with changing
categories associated with collateral and non-collateral loans
NAIC - Investment Reporting Subgroup
BA Categories, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
• This will likely lead to a reduced BA break out, so insurers with exposure to
this schedule should keep this issue on their radar as reclassification may be
necessary for some investments
• The big thing about this review will be the possible changes in RBC charges
and even the potential for it to bring up conversations around re-classification
and admitted vs. non-admitted decisions
NAIC - Investment Reporting Subgroup
BA Categories, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Schedule D Part 1 Column 26 is an electronic only column for Collateral Type
• There are currently 21 possible choices
WHY
• 10 of the 21 comprise nearly 90% of the total investments held by insurers
• The necessity of this kind of break out is in question
NAIC - Investment Reporting Subgroup
Collateral Type
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
PROJECT STATUS
• Examples of collateral type on the potential chopping block include:
• 11 – Trade Receivables (possible duplication of WCFI that should be held on the BA)
• 12 – Loan
• 15 – Recreational Vehicles
• 17 – Tax Receivables
• 20 – Single Asset
• Current discussion is around combining these types into other
TAKEAWAY
• Insurers should maintain awareness of this project, especially if they hold
securities with some of these more esoteric forms of collateral
NAIC - Investment Reporting Subgroup
Collateral Type, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Clarification on reporting foreign issues
• Further clarification on top 10 issues
WHY
• Interested parties and insurers have expressed concern about the
inconsistency of reporting both on foreign securities and on the top ten
issuer concentration disclosure
• Both the definition of foreign and at what level to group issuer
concentration have become issues
• There are currently foreign codes on securities that do not have foreign risk
NAIC - Investment Reporting Subgroup
Supplemental Investment Risk Interrogatories
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
• This is still an open issue with no changes exposed
• Changes to foreign code as well as the supplemental risk interrogatories may
be forthcoming
• The group has expressed that base 6 is a starting point for issuer
concentration but expectations after that is still uncertain
• The proliferation of foreign code has caused its use on securities that have
historically not been considered foreign
• The treatment of supranational securities is inconsistent and still unclear
• Insurers should keep any updates in relation to this on their radar
NAIC - Investment Reporting Subgroup
Supplemental Investment Risk Interrogatories
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Catastrophe Bonds are investments whose principal repayment is determined based on a triggering event or specified risk
WHY
• At the NAIC 2014 Fall National Meeting, Nationwide, in conjunction with the North American CRO Council, proposed to have the NAIC review their guidance in an effort to increase insurance companies use of this kind of investment
• The returns on these investments are not correlated with market fluctuations
TAKEAWAYS
• The chairs of Statutory Accounting, Capital Adequacy, Life Risk-Based Capital (RBC), Investment RBC and Blanks met to discuss the proposal.
• It was decided that the proposal should be referred to the SAPWG to determine whether or not it should develop specific statutory accounting principles for these investments
NAIC - Valuation of Securities Task Force
Catastrophe Bonds
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• The 5*/6* rule allows insurers to admit assets that temporarily lack enough
information or time for the SVO to calculate a designation
WHY
• Recent confusion around what “structured securities” refers to has meant that
insurers are using this election in ways that disagree with NAIC expectations
TAKEAWAY
• The NAIC staff has requested that the term be clarified to apply to a core group
of complex corporate securities where data is not available or it is cost
prohibitive to acquire the data
5*/6* and Structured Products
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Insurers are currently required to file within 120 Days of the original purchase
• Insurers must also file for annual updates
WHY
• Once done by one insurer, the rating of the security can be shared by other
insurers without incurring the cost of the initial filing
• The goal is to decrease the number of year-end un-assessed securities
caused by an uneven distribution of filings
• The number one culprit seems to be the annual updates to the filings, which
insurers wait to do, hoping another insurer will file and incur the cost of the
filing
Changes to the SVO Filing Process
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Valuation of Securities Task Force
Changes to the SVO Filing Process, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
• The list of “observations” that are currently proposed include:
• Moving the 120 day rule to 30 days
• A new system for identifying the initial filer of a security and having that insurer maintain
responsibility for maintenance of the filing
• Require the filing of owned securities shortly after the financial statements become available
• Having the SVO own the assignment of the Z designation process
• Suggested elimination or review for relevancy of the 5*/6* process
• This review could result in an increase in non-admitted assets if insurers are
unable to comply with these time lines and an increase in costs associated
with initially filing a security
• Asset Managers responsibility?
NAIC - Valuation of Securities Task Force
Changes to the SVO Filing Process, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• A non-recourse loan is a loan where the cash flows are derived from loans
to organizations that meet certain charitable criteria
WHY
• These underlying loans have no obligation to pay and the organization’s
viability is questionable since it is based on charitable contributions
TAKEAWAY
• Recently the SVO realized it had been providing designations on these
types of securities but was not authorized to rate them. They pulled the
ratings from the VOS database which caused the insurers difficulty in filing
their annual reports
Non-Recourse Loans
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Financial Condition Committee (responding to a request by the Executive Committee) has requested that the VOS Task Force review the Derivative Instruments Model Regulation (#282) against the NAIC’s Model Law Development criteria.
WHY
• There have been many changes in the derivative landscape over the past few years and the current model may no longer be useful or applicable
• The VOS Task Force has requested that NAIC staff coordinate and bring together industry experts to review how these changes could or have affected the current model as well as how insurers could or should utilize derivatives in their businesses.
Derivative Instruments Model Regulation (#282)
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAYS
• There could be a change in the model or a whole new model for states to use as reference in forming regulatory rules and limitations for derivative transactions
• This could lead to changes in the laws of specific states who could react to the model changing. If you operate in a state that has specific guidance on allowable derivative transactions this may be a relevant topic to monitor
• There are plans to have several open meetings to discuss possible changes
Derivative Instruments Model Regulation (#282), cont.
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• The VOS Task Force initially proposed that insurers be required to file private placements with the NAIC, even if they had a CRP rating
WHY
• The SVO claimed that in many cases the rating was not being monitored and may be irrelevant
• Industry pushed back and the project was refocused to concentrate on reducing the number of exceptions on Jumpstart reports
TAKEAWAY
• The SVO has not had any recent discussions with industry on the topic but intends to continue the dialogue this year.
• NAIC staff plan to review 2014 filings to determine if the unexplained exceptions have persisted into the current filing year.
• SVO is working on adding new data feeds and the related BWG project on identifiers should reduce the number of false positives on the Jumpstart reports
Private Letter Ruling Projects
NAIC - Valuation of Securities Task Force
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• As part of the investment classification review, the guidance for Surplus Notes (currently a BA asset) is being reviewed
WHY
• Questions and inconsistencies have arisen as to the guidance on how insurers handle Surplus notes
• Current Guidance:
• “Capital or surplus debenture(s) must not be valued in excess of the lesser of the value determined above or amortized cost“
• Above there are paragraphs referencing both a statement factor and outstanding face value
• Differences between the statement value and these reference amounts could potentially be put through capital and surplus or treated as a non-admitted asset
NAIC - Statutory Accounting Principles Working Group
Surplus Notes – 2014-25
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
TAKEAWAY
• The current proposed revision clarifies the following:
• Surplus Notes with a ”NAIC 1 rating” should be reported at amortized cost.
• Surplus Notes that are not rated by a CRP, or have a rating other than NAIC 1, shall
be reported at the lower of amortize cost or fair value.
• Simplifies previous guidance in SSAP No. 41 in regards to valuation changes.
Surplus Notes – 2014-25, cont.
NAIC - Statutory Accounting Principles Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• The agenda item requests specific guidance from the Working Group on the reporting of
Short Sales
WHY
• Traditionally the NAIC has referred insurers to their state of domicile
TAKEAWAYS
• Key information that will be discussed:
• How a stock short sale is used
• Concept of unlimited losses for stock short sales
• Naked short sales
• GAAP treatment within existing derivative guidance
• Current statutory guidance
• How short sales are used by securities borrowing transactions
• It is anticipated that after industry provides feedback on this item, there will be discussion
on changes to SSAP guidance, or possibly a new issue paper.
Short Sales – 2015-02
NAIC - Statutory Accounting Principles Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Modification to SSAP 26 to deal with callable bond amortization and prepayment penalties
WHY
• Clarify accounting guidance on make whole calls and continuously callable bonds
• Clarify that prepayment penalties should flow through the realized G/L portion of investment income
TAKEAWAY
• Three proposed changes to the SSAP will instruct companies to:
• Report prepayment penalties and acceleration fees as realized gains (difference between consideration and book adjusted carrying value) at time of early liquidation.
• Provide illustrations and revisions to the proper accounting treatment of continuously callable bonds utilizing the “Yield to Worst” methodology.
• Clarify that bonds with “make whole” provisions follow the yield to worst methodology, without exception.
Prepayment Penalties & Amort of Callable Bonds – 2015-04
NAIC - Statutory Accounting Principles Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
WHAT
• Solicitation of feedback on improved consistency in the determination of measurement method for Investments in Subsidiary, Controlled, and Affiliated Entities
WHY
• Concern about reporting entities transferring non-admitted assets into a non-insurance SCA or avoiding state specific rules through insurance SCA investments
TAKEAWAYS
• Because the valuation of non-insurance SCA investments is based on audited GAAP financials, there is concern about valuation of these investments
• Proposed change to restrict the amount of assets held in an SCA to qualify as admitted assets
• Investments in Insurance SCAs are based on the statutory value, which can vary by state
• Proposed changes include the requirement that valuations of insurance SCAs be done as calculated per the AP&P Manual
Investments in SCAs – 2015-08
NAIC - Statutory Accounting Principles Working Group
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Statutory Accounting Principles Working Group
WHAT
• For purposes of the cash flow statement, cash is defined to include cash, cash equivalents and short-term investments (no change)
• Expands disclosure of non-cash items to include non-cash operating items in addition to financing and investing items
WHY
• Clarifies that the Statement of Cash Flow shall only include transactions involving cash
TAKEAWAY
• Evaluate non-cash transactions related to investments so you can ensure proper presentation in the Statement of Cash Flow
• Effective 12/31/15
Treatment of Non-Cash Items in the Cash-Flow Statements - Adopted
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Statutory Accounting Principles Working Group
WHAT
• A single real estate property investment that is wholly-owned by an LLC that is directly and wholly-owned by the reporting entity shall be reported on Schedule A if certain criteria are met
WHY
• These more closely resemble a direct investment in real estate
TAKEAWAY
• Beneficial through lower risk charge and reduced audit costs
UPDATE
• Proposed SAPWG 2015-11 clarifies that an encumbrance by an unrelated party is permitted within this guidance
• Proposed 2015-07BWG requires “!” in Schedule A, Part 1, Column 2
• Effective 1/1/15
Single-Member and Single-Asset LLCs – Real Estate - Adopted
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Statutory Accounting Principles Working Group
WHAT
• Exposed four discussion documents related to investment classifications under SSAP No. 26.
• Security Definition • Contractual Amount of Principal Due • ETF Analysis • Non-Bond Definitions
WHY
• Proposes a comprehensive project to review the “investment SSAPs” with suggestions to clarify definitions, scope, and the accounting method/related reporting
Investment Classification Review - Discussion
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
NAIC - Statutory Accounting Principles Working Group
TAKEAWAYS
• By incorporating the US GAAP definition of a security, it will be clear that
some investments within scope of SSAP No. 26 do not meet the definition
of a bond
• By requiring all SSAP No. 26 investments to have a “contractual amount of
principle due”, ETF’s and mutual funds would be eliminated from the scope
of SSAP No. 26
• Identify non-bond items (e.g. Loan Participations; Loan Syndication; TBA
Securities; Hybrids; Convertible Securities) in your portfolio and review the
definitions in this document for consistency
• ETFs will be reported in a separate schedule and require a fair value
measurement method or NAV as a practical expedient
Investment Classification Review – Discussion, cont.
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB Updates
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures
WHAT
• Requires entities to account for repurchase-to-maturity transactions as secured
borrowings
• Changes in accounting guidance on linked repurchase financing transactions is
expected to result in these being reported as secured borrowings
• Expands disclosure requirements related to certain transfers of financial assets that are
accounted for as sales and certain transfers accounted for as secured borrowings
(specifically, repos, securities lending transactions, and repurchase-to-maturity
transactions).
• Effective 1/1/15
WHY
• The new guidance aligns the accounting for repurchase-to-maturity transactions and
repurchase agreements executed as a repurchase financing with the accounting for
other typical repurchase agreements
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, cont.
TAKEAWAYS • More consistent accounting of repurchase agreements by reporting them as secured
borrowings
• New disclosures of repos, securities lending transactions and repurchase-to-maturity
transactions accounted for as secured borrowings
SAP IMPLICATIONS • In response to ASU 2014-11, the following options are being considered:
• Incorporate a “derecognition” (sale) accounting approach for all repurchase agreements
• Follow a secured borrowing for all repurchase agreements
• Incorporate a modified sale/secured borrowing approach for statutory accounting
• Recommends that the guidance for repurchase agreements and securities lending be
removed from SSAP 103 and create a new SSAP
• Proposal to state that long-term repos are non-admitted in SSAP 103
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Investments in Qualified Affordable Housing Projects
WHAT • Permits reporting entities to make an accounting policy election to account for
their investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met.
• Effective 1/1/15
WHY • Permits the entity to present the investment’s performance net of the related
tax benefits as part of income tax expense
• Simplify the amortization method an entity uses
TAKEAWAY • To qualify for proportional amortization method, 5 conditions must be met
• The investor is a limited liability entity that is a flow-through entity for both legal
and tax purposes
• All LIHTC investors to disclose certain information
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Investments in Qualified Affordable Housing Projects, cont.
SAP IMPLICATIONS • SAPWG 2014-24 proposes to adopt ASU 2014-01 with the following
modifications:
• Continued application of a modified amortized cost methodology for insurer
reporting entities (SSAP No. 93 doesn’t permit the use of the effective yield method)
• A gross presentation in the income statement (i.e. the amortization will be reflected
as a component of investment income and the use of the tax credits and other
benefits will continue to be reflected as a decrease to income tax expense)
• 2015-12BWG proposes additional disclosures required by the proposed modifications
to SSAP No. 93:
• The amount of low-income housing tax credits and other tax benefits recognized
during the years presented
• The balance of the investment recognized in the statement of financial position for
the reporting periods presented
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Receivables - Troubled Debt Restructurings by Creditors
WHAT
• Reclassification of residential real estate collateralized consumer mortgage
loans upon foreclosure
• Effective 1/1/15
WHY
• To reduce diversity by clarifying when an in substance repossession or
foreclosure occurs
TAKEAWAY
• Record foreclosed residential real estate when (1) the creditor obtains legal
title or (2) the borrower conveys all interest to the creditor
• Disclose (1) the amount of residential real estate held by the creditor and (2)
residential mortgage loans that are in the process of foreclosure
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Receivables - Troubled Debt Restructurings by Creditors, cont.
SAP IMPLICATIONS
• SAPWG 2014-30 adopted, with modification, ASU 2014-04 and shall be
applied prospectively from the date of adoption (March 28, 2015)
• ASU 2014-04 guidance has been modified to remove the restrictions limiting
it to residential real estate with a consumer mortgage loan. The guidance
reflected in this statement shall encompass all foreclosed mortgage loans
collateralized by real estate.
• Additionally, ASU 2014-04 guidance has been modified to require a “lower-of”
valuation method for the real estate collateral recognized from a foreclosure.
This guidance will result in a deferral of any gain as a result of a mortgage
loan foreclosure.
• 2015-09BWG will add instructions for a new disclosure to Note 5A for
“Mortgage Loans Derecognized as a Result of Foreclosure”
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Receivables -Troubled Debt Restructurings by Creditors
WHAT
• Classification of Certain Government-Guaranteed Mortgage Loans upon
Foreclosure
WHY
• Some creditors reclassify those loans to real estate consistent with other
foreclosed loans that do not have guarantees; others reclassify the loans to
other receivables
• Reduce the diversity by requiring certain government-guaranteed mortgage
loans to be classified as an other receivable upon foreclosure when 3
conditions are met
TAKEAWAY
• Identify all residential and nonresidential mortgage loans with certain
government guarantees (e.g. FHA, VA)
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Receivables - Troubled Debt Restructurings by Creditors, cont.
SAP IMPLICATIONS
SAPWG 2014-30 adopted ASU 2014-14 and shall be applied prospectively from the date
of adoption (March 28, 2015)
Added a disclosure related to the foreclosure of mortgage loans
2015-09BWG proposes adding paragraph 8 to Note 5A to provide data on “Mortgage
Loans Derecognized as a Result of Foreclosure”:
Aggregate amount of mortgage loans derecognized
Real estate collateral recognized
Other collateral recognized
Receivables recognized from a government guarantee of the foreclosed mortgage loan
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Disclosures about Hybrid Financial Instruments with Bifurcated Embedded Derivatives
WHAT
• Require that an entity disclose (in both interim and annual reporting periods)
the carrying amount, measurement attribute, and line item within the balance
sheet and the income statement in which each bifurcated embedded
derivative and its related host contract are presented.
• Topic 815
WHY
• To increase the transparency and usefulness of the information provided in
the notes to financial statements about hybrid financial instruments that
contain bifurcated embedded derivatives.
TAKEAWAY
• Consider all assets and liabilities in scope for this proposal, especially
insurance contracts NAIC
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Financial Instruments: Hedging
WHAT • This project addresses issues related to hedge accounting for financial
instruments and non-financial items
• Will not adopt IFRS 9
• What are the implications of a reasonably effective threshold for hedges of
financial assets and liabilities
WHY • To make targeted improvements to the hedge accounting model
TAKEAWAY • Continue to monitor the FASB’s progress on this issue
• Still in initial deliberations
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Financial Instruments: Classification and Measurement
WHAT
• Investments in equity securities would be measured at fair value through net
income, unless they qualify for the proposed practicability exception
• Changes in instrument-specific credit risk for financial liabilities that are
measured under the fair value option would recognized in OCI
• Disclosure of the fair value of financial instruments measured at amortized
cost would no longer be required for entities that are not public business
entities
WHY
• To incorporate targeted improvements
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Financial Instruments: Classification and Measurement, cont.
TAKEAWAY
• Expected to impact the accounting for equity investments, financial liabilities
under the fair value option, and the presentation and disclosure
requirements for financial instruments
• Final ASU expected to be issued during the 4th quarter 2015
• Effective date to be aligned with the Impairment project?
• Not converged with IFRS
• Drafting final standard
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Financial Instruments: Impairment
WHAT
• Recognize an allowance for management’s current estimate of lifetime
expected credit losses for loans, trade receivables, HTM debt securities and
certain other financial assets measured at amortized cost
• The OTTI model used today for AFS debt securities would be modified to
require an allowance for credit impairment rather than a direct write-down
• Upon acquiring a PCI asset, the entity would recognize as its allowance for
expected credit losses the amount of contractual cash flows not expected to
be collected as an adjustment that increases the cost basis of the asset
• Entities would be required to make disclosures about the credit quality of
certain financing receivables by year of origination (i.e. vintage)
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
FASB - Accounting for Financial Instruments: Impairment, cont.
WHY
• To develop a single credit loss model for financial assets that enables more
timely recognition of credit losses
TAKEAWAY
• Begin identifying “all contractual cash flows that the entity does not expect to
collect over the contractual life of the financial asset”
• Final ASU expected to be issued during the 4th quarter 2015
• Effective date to be aligned with the Classification and Measurement
project?
• Not converged with IFRS
• Drafting final standard
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Other Updates
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Money Market Fund (MMF) Reform
WHAT
• US Securities and Exchange Commission adopted operational and structural
amendments to the rule set that governs money market funds
WHY
• Address MMFs susceptibility to heavy redemptions in times of stress
• Increase transparency of MMF risk
• Preserve MMF benefits
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
MMF Reform, cont.
TAKEAWAYS
• Removing the valuation exception for MMFs and requiring a floating NAV
• Limited to Prime Institutional Prime MMFs and does not include Retail or Government
Funds
• Government funds can voluntarily impose liquidity fees and gates
• Creating new tools for boards to prevent heavy redemptions:
• Liquidity fees
• Suspend redemptions temporarily (“gate”)
• Definition of Weekly Liquid Assets for Gates and Fees
• New Diversification Requirements
• Additional Stress Testing
• Increased transparency
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
MMF Reform, cont.
ACCOUNTING IMPACTS
• Valuation
• Tracking unrealized Gains/Losses
• Classification
• SEC: Shareholders may question whether or not floating NAV MMF’s should be
classified as “cash equivalents” on the balance sheet.
•NAIC: Have been some movements as funds reclassify and change their
strategies. Could impact D2.2 vs DA classification
• Operational
• GL Changes
• Pricing Controls and Data
• Potential Disclosures: FAS157 Levels
• Sweep Account Assets
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Best Practices
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
How to Stay Current on Guidance Changes
PARTNER WITH PROVIDERS
• Auditors
• Software Providers
• Consultants
DON’T FOLLOW JUST ONE BASIS
• SAP – NAIC
• U.S. GAAP – FASB
• PCC – FASB
• IFRS – IASB
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
How to Stay Current on Guidance Changes
GET INVOLVED
• Attend an NAIC National Meeting (3 times per year)
• Participate in NAIC Conference Calls (via Chorus Call dial-in number)
• Join an industry trade group (e.g. ACLI, NAMIC, AIA, AHIP, RAA)
• Network at IASA events (e.g. Annual Conference, Local Chapters)
• Respond to exposure drafts from the NAIC, FASB, IASB
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Questions?
IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW
Please Complete the Session Evaluation Form on the Conference
App and Include Your Conference Registration ID# to be Included in
a Drawing for a Free Conference Registration for the 2016 Annual
Conference!
NOTE: Your Conference Registration ID# is Located at the Bottom
Left Hand Corner of Your Badge.