US GAAP Update · • Single measurement objective for assets held at amortized cost: • Expected...
Transcript of US GAAP Update · • Single measurement objective for assets held at amortized cost: • Expected...
US GAAP Update
August 18, 2017
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Today’s topics
• Insurance
• Financial Instruments – Classification and Measurement
• Financial Instruments - Impairment
• Revenue Recognition
• Leases
• Other Agenda Topics
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On the horizon
Insurance
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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: Proposed targeted accounting changes for long duration contracts; exposure draft issued in September 2016
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Talkingtheory
Getting feedback
Coming soon
Improve and simplify the financial reporting requirements
Enhanced disclosures for claim liabilities and targeted improvements to the accounting for long duration insurance contracts.
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FASB targeted improvements –Long-duration contracts
Proposed improvements in exposure draft*:
• 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
• 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
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Responding to user requests to update assumptions, simplify, and improve consistency
FASB proposed ED “targeted improvements” are pervasive
*Certain decisions in the exposure draft were addressed in the August 2, 2017 FASB Board meeting and tentative changes were made.
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What are the next steps
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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 2016
75 day comment period. Comments were due December 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 was held on April 19th. Feedback was largely consistent with the comments above
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What are the next steps
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Looking forward
• Re-deliberations started again on August 2nd with the following tentative decisions reached:
◦ Assumption Updates - Re-affirmed frequency & approach to unlocking for the liability for future policy benefits for non-par traditional and limited pay contracts and clarified the following:
a) Permit but not require expense assumptions such as termination and settlement expenses to be updated
b) Contracts from different issue years should not be grouped
o Discount Rate - Use of a upper medium grade fixed-income instrument yield (“A” rated).
o Transition - Require prospective transition approach for liability for future policy benefits for non-par traditional and limited pay contracts – option for retrospective approach, if elected.
o Future agenda topics include: participating contract assumptions, market risk benefits, amortization of DAC, and presentation and disclosure.
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Navigating the new landscape
Financial instruments (recognition and measurement)
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Recognition and measurement overviewIssued January 2016
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Impacts
• Equity investments:
- FV-NI
- Measurement alternative availablefor certain equity securities within the scope of the new standard
- Single step impairment model forequi 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
Affects public and private companies that hold financial assets or owe financial liabilities
Reduces complexity in accounting for financial instruments
Provides users decision-useful information about financial instruments
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What is affected
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Mostly impacts investments in equity investments and financialliabilities under the fair value option
Financial instruments expectedto 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 underthe FVO
• Consolidated equity investments
• Equity method investments
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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, 2017.
- All other entities – annual periods beginning after December 15, 2018, and for interim periods within annual periods beginning after December 15, 2019.
• 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.
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Navigating the new landscape
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Financial instruments – Impairment
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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
- IASB - Dual measurement lifetime losses upon trigger
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Recognize losses on a more timely basis
Current “incurred loss model” – criticized for delaying timely loss recognition
Model based on an expected loss approach
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What’s in scope of CECL?
Scope of the standard
• Loans
• Held to maturity debt securities
• Loan commitments
• Trade receivables
• Lease receivables
• Reinsurance receivables
• Financial guarantees
• Purchased credit 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
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CECL applies to financial assets subject to credit losses and measured at amortized cost, and certain off-balance sheet credit exposures
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How does it workOverview 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
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How does it workAFS debt security impairment model – What’s new
• Similar approach to impairment guidance under ASC 320 with the following changes:
- Modified approach will require impairment losses to be accounted for as an allowance subject to future reversal upon credit improvements
- Duration of loss is no longer a consideration in determining whether a
- security is impaired
- No forecasts of future recoveries post balance sheet date
- No explicit requirement to evaluate the historical volatility of the fair value of a security
- Measurement and recognition of credit losses are “capped” at the excess of amortized cost over fair value
• Measurement of credit loss based on the present value of expected cash flows
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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, 2021
- 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)
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Navigating the new landscape
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Revenue from contracts with customers
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Revenue recognition overviewIssued May 2014
Impacts
• Final amendments issued in Q4 2016
• Standard could significantly change how many entities recognize revenue
• Standard is intended to be principles- based
• Will remove existing industry-specific guidance
• Expanded qualitative and quantitative disclosures(annual and interim)
• Transition Resource Group
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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
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Who is affected
Scope of the standard
Contracts with customers of all entities and industries within scope with only certain transactions excluded
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Scope set to improve consistency and comparability within industries, across industries, and across capital markets
Specifically excluded
• Lease contracts
• Insurance contracts
• Financial instruments
• Guarantees (other than product warranties)
• Certain nonmonetary exchanges
• Contracts with other than customers (e.g., collaborations)
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When is it effective
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US GAAPPublic (PBE)
US GAAPNon-public IFRS
Effective Date
Beginning afterDecember 15, 2017
2018 calendar year
Beginning after December 15, 2018
2019 calendar year
Beginning on January 1, 2018
2018 calendar year
Early adoption permitted?
Yes
No earlier than the original effective datefor public entities
2017 calendar year
Yes
No earlier than the original effectivedate for public entities
2017 calendar year
Yes
Method ofadoption
Retrospective (with certain practical expedients allowed) or modified retrospective
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How does it work
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Identify the contract(s) with a customer
Identify the performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligations in the contract
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How does it workFive key steps
Recognize revenue when (or as) the entity satisfies a performance obligation5
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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?
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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 606
• Includes life and health, property casualty, and mortgage guaranty insurance
• Investment contracts (accounted for as a financial instrument 944-825)
• 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)
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Navigating the new landscape
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Leases
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Leases overviewIssued February 2016
Impacts
• Balance sheet will be grossed up
• Financial metrics and debt covenants may be affected
• Elements of a contract may be a lease and will now be on balance sheet for lessees
• IASB approach differs (substantially for lessees)
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Improve, simplify and converge the financial reporting for leases
Create a model that provides a faithful representation of leasing transactions for both lessees and lessors
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Who is affected
Specifically excludes leases of:
• Intangible assets, including licenses of internal-use software
• To explore for or use minerals, oil, natural gas, and similar nonregenerative resources
• Biological assets, including plants and living animals
• Inventory
• Assets under construction (construction in process)
Short-term lease exception for lessees
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The new standard is applicable to virtually all parties to a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
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Identifying a lease
Lease is present in a contract if the contract includes both:
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An identified asset
Is explicitly or implicitly specified
Supplier has no practical ability to substitute or would not economically benefit from substituting
The right to control use of the asset during the term
The ability to obtain substantially all economic benefits from the use of the asset
Decision-making authority over the use of the asset
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Separating lease and nonlease components
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Lessee • Allocate based on relative standalone prices
Lessor • Allocate using requirements in ASC 606
Components include only items/activities that transfer a good or service to the lessee
• Consequently, reimbursement or payment of lessor’s costs (e.g., taxes, insurance) are not separate components:
- No separate allocation made to such elements
- Instead, include as part of the lease component
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Effective date and transition
Adoption
• Effective January 1, 2019 for calendar-year public companies
• Other entities have an additional year for annual filings
• Early adoption is permitted
Transition
• Modified retrospective approach
• May apply hindsight to existing leases to determine lease term and asset impairment
• Change in classification (between operating and capital/finance)
Relief package
• 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
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On the horizon
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Other topics
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FASB Priorities
An active environment
• Major projects Complete remaining projects
• 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 Invitation to comment issued in 2016 to identify priorities for the future agenda
“Developing the right solutions means identifying the right problems.”
FASB Chairman, Russ Golden
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Standards effective in 2017
Effective in 2017*
Inventory measurement – lower of cost and NRV
Deferred income taxes – balance sheet classification
Stock-based comp – various simplifications
Equity method - simplifying transition for previously held investments
Derivatives – accounting for contract novations
Derivatives - contingent put/call in debt instrument
Consolidation – interests held through related parties under common control
Consolidation – not-for-profit (NFP) investors in limited partnerships
*For calendar year-end public business entities
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Standards effective in 2018 or later
Effective in 2018 or later Effective
dateEarly
adoption
Revenue – new converged standard (amendments) 2018* 2017
Liabilities – breakage for stored-value cards 2018* Yes
Financial instruments – recognition & measurement 2018** No
Statement cash flows – classification of specific items 2018* Yes
Business combinations - definition of a business 2018* Yes
Income taxes – Intra entity asset transfers 2018* Yes
NFP entities – financial statement presentation 2018 Yes
Leases – new standard 2019* Yes
Financial instruments – impairment 2020* 2019
Goodwill – simplifying the impairment test 2020** Yes
*For calendar year-end public business entities ** For calendar year-end public business entities who are SEC filers 34
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