Investment Accounting and Reporting - IASA 2015/Sessions...changes will impact your investment reporting 2. Address current regulatory topics being discussed that relate to investment

IASA 87TH ANNUAL EDUCATIONAL CONFERENCE & BUSINESS SHOW

Investment Accounting and Reporting Updates

Session 103


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


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


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


Survey Results

What Specific NAIC Investment Accounting And Reporting Issues Is Your

Company Concerned With Over The Next Year? (Check all that apply.)


Survey Results

What Specific FASB Investment Accounting And Reporting Issues Is Your

Company Concerned With Over The Next Year? (Check all that apply.)


Agenda

1. NAIC Updates

2. FASB Updates

3. Other

4. Best Practices


NAIC Updates


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



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



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


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



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


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.


Identifier Challenges – 2015-14BWG


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.



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.



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


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.


Security Description, cont.


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


Security Description, cont.


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


BA Categories


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


BA Categories, cont.


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


BA Categories, cont.


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


Collateral Type


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


Collateral Type, cont.


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


Supplemental Investment Risk Interrogatories


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


Supplemental Investment Risk Interrogatories


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


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



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




Changes to the SVO Filing Process, cont.


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?


Changes to the SVO Filing Process, cont.


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



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)



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.



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



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


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.



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



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



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




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


Treatment of Non-Cash Items in the Cash-Flow Statements - Adopted



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


Single-Member and Single-Asset LLCs – Real Estate - Adopted



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



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.


FASB Updates


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).


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


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


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.


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


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


FASB - Receivables - Troubled Debt Restructurings by Creditors

WHAT

• Reclassification of residential real estate collateralized consumer mortgage

loans upon foreclosure


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


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”


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)


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


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


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


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


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


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)


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


Other Updates


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


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


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


Best Practices


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


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


Questions?


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Documents

Investment Accounting and Reporting - IASA 2015/Sessions...changes will impact your investment reporting 2. Address current regulatory topics being discussed that relate to investment