GAAP accounting update

Baker Tilly refers to Baker Tilly Virchow Krause, LLP,

an independently owned and managed member of Baker Tilly International.

Agenda

1) Introduction

2) ASU 2015-16: Business Combinations (Topic 805) – Simplifying the Accounting for

Measurement-Period Adjustments

3) ASU 2015-14: Revenue from Contracts with Customers (Topic 606) – Deferral of

the Effective Date

4) ASU 2015-07: Fair Value Measurement (Topic 820) – Disclosures for Investments

in Certain Entities that Calculate a Net Asset Value per Share

5) ASU 2014-18: Business Combinations (Topic 805) – Accounting for Identifiable

Intangible Assets in a Business Combination

6) ASU 2014-15: Presentation of Financial Statements – Going Concern (Subtopic

205-40) – Disclosures of Uncertainties about and Entity’s Ability to Continue as a Going Concern

7) ASU 2014-09: Revenue from Contracts with Customers (Topic 606)

8) ASU 2015-09: Insurance (Topic 944) – Disclosures about short-duration contracts

9) Targeted Improvements to the Accounting for Long-Duration Contracts

10) Questions

ASU 2015-16:

Business Combinations (Topic 805) –

Simplifying the Accounting for

Measurement-Period Adjustments

ASU Update 2015-16:

Business Combinations

(Topic 805) – Simplifying the Accounting for

Measurement-Period Adjustments

>

FASB issued this as part of its Simplification Initiative

>

Stakeholder feedback indicated that retrospective

application of provisions amounts recorded during business combinations adds costs and complexity

>

Applies to all entities that have reported provisional

ASU Update 2015-16:

Business Combinations

(Topic 805) – Simplifying the Accounting for

Measurement-Period Adjustments (cont.)

>

Recognition of changes to provisional amounts in period

identified (previous accounting required retrospective application)

>

Presentation of prior period impact of changes to

provisional amounts in current period – face of statements of operations or disclose

>

Effective date:

– December 15, 2015 (public)

ASU 2015-14:

Revenue from Contracts with

Customers (Topic 606) – Deferral of

the Effective Date

ASU Update 2015-14:

Revenue from Contracts with

Customers

(Topic 606) – Deferral of the Effective Date

>

ASU 2014-09 issued in May 2014

>

Effective date was December 15, 2016 (public) and

December 15, 2017 (non-public)

>

Stakeholders requested deferred through commentary

ASU Update 2015-14:

Revenue from Contracts with

Customers

(Topic 606) – Deferral of the Effective Date

>

Board deferred due to:

– Stakeholder request

– Evaluation and approval of other standard setting activity associated with guidance in 2014-09

– Technological changes that may be necessary to comply with 2014-09

– One year deferral to:

» December 15, 2017 and

ASU 2015-07:

Fair Value Measurement (Topic 820)

– Disclosures for Investments in

Certain Entities that Calculate a Net

Asset Value per Share

ASU Update 2015-07:

Fair Value Measurement

(Topic 820) – Disclosures for Investments in

Certain Entities that Calculate a Net Asset Value

per Share

>

Topic 820 permits an entity from using net asset value as

a practical expedient of fair value for certain investments

>

Current treatment in fair value hierarchy disclosures

based on redeemable nature (currently redeemable, never or sometime in future)

– Length of time prior to redemption should be evaluated to determine disclosure

ASU Update 2015-07:

Fair Value Measurement

(Topic 820) – Disclosures for Investments in

Certain Entities that Calculate a Net Asset Value

per Share

>

Guidance removes requirement to disclose such

investments in fair value hierarchy disclosures

>

Guidance removes requirement to disclose information

for ALL securities “eligible” for use of practical expedient and limits to those held at NAV

>

Effective

ASU 2014-18:

Business Combinations (Topic 805) –

Accounting for Identifiable Intangible

Assets in a Business Combination

(PCC consensus standard)

ASU Update 2014-18:

Business Combinations

(Topic 805) – Accounting for Identifiable Intangible

Assets in a Business Combination (PCC

consensus standard)

>

Stakeholder feedback of private companies indicated

costs of accounting for identifiable intangibles during business combinations outweigh benefits

>

This is an accounting alternative, not complete

replacement

>

Applies upon election, to all companies, other than public

ASU Update 2014-18:

Business Combinations

(Topic 805) – Accounting for Identifiable Intangible

Assets in a Business Combination (PCC

consensus standard)

>

Applies when considering fair value of intangible assets

as a result of in scope transactions

>

Main provisions:

– Should no longer recognize separately from goodwill (1) customer-related intangible assets unless capable of being sold or licensed separately and (2) non-compete agreements

ASU Update 2014-18:

Business Combinations (cont.)

(Topic 805) – Accounting for Identifiable Intangible

Assets in a Business Combination (PCC

consensus standard)

>

Intangibles other than customer-related intangibles will

continue to be recognized

>

Current Accounting requires recognition of separately

identifiable intangible assets

– Legal or contractual – Separable

>

Upon the occurrence of the first transaction after

ASU 2014-15:

Presentation of Financial Statements

– Going Concern (Subtopic 205-40)

– Disclosures of Uncertainties about

and Entity’s Ability to Continue as a

Going Concern

ASU Update 2014-15:

Presentation of Financial Statements –

Going Concern

(Subtopic 205-40) – Disclosures of Uncertainties

about and Entity’s Ability to Continue as a Going

Concern

>

Financial statements are issued on a going concern

presumption (entity will continue operations)

>

When and if the liquidation of a company is imminent,

liquidation basis of accounting should be applied.

>

When liquidation is not imminent but events may indicate

the entity may not continue financial statements should be issued on a going concern basis

>

ASU issued to help determine if the entity should disclose

(Subtopic 205-40) – Disclosures of Uncertainties

about and Entity’s Ability to Continue as a Going

Concern

>

Currently no guidance in GAAP for management to

evaluate if a going concern and no guidance on disclosures

>

Currently, GAAS requires auditor consideration (one year

of reporting date typically)

>

SEC has guidance when auditor opinion reflects

emphasis of a matter for going concern financial statements

>

Applies to all entities

ASU Update 2014-15:

(Subtopic 205-40) – Disclosures of Uncertainties

about and Entity’s Ability to Continue as a Going

Concern

>

Guidance requirements management to evaluate if any

conditions or events about the entity’s ability to continue as a going concern

– Evaluation based on relevant conditions and events that are known at the date the financial statements are issued;

– Going concern exists if it is probably that entity will be unable to meet obligations as they become due within one year

– Should evaluate if management plans will alleviate/mitigate concerns

ASU Update 2014-15:

(Subtopic 205-40) – Disclosures of Uncertainties

about and Entity’s Ability to Continue as a Going

Concern

>

Guidance requirements management to evaluate if any

conditions or events about the entity’s ability to continue as a going concern

– Mitigation plans only relevant to the extent probably they will be effectively implemented and plans will mitigate concerns

– Disclosure of what led to substantial concern, management’s evaluation and mitigation plans that alleviated concerns or – Disclosure of what led to substantial concern, management’s

evaluation and mitigation plans that are intended to mitigate concerns

>

Effective for periods after December 15, 2016

ASU Update 2014-15:

ASU 2014-09:

Revenue from Contracts with

Customers (Topic 606)

ASU Update 2014-09:

Revenue from Contracts with

Customers

(Topic 606)

>

Standard eliminates transaction and industry specific

revenue recognition guidance under current U.S. GAAP and replaces it with principles based approach

>

Implementation issues:

– Issue #1 – Scope: Investment contracts with ASC 944

– Issue #2 – Scope: Interaction of contracts accounted for under ASC 944 and the guidance in ASC 606-10-15-2 and 15-4

– Issue #3 – Interaction of health service contracts accounted for under ASC 954 and 944

ASU Update 2014-09:

Revenue from Contracts with

Customers

(Topic 606)

>

Application to insurance industry

– Insurance contracts or contractual rights and obligations are fully or partially scoped out of the revenue standard

– Non-insurance contracts – asset management; insurance broking; pension administration; claims handling etc. may fall entirely in the scope of new standard

ASU Update 2014-09:

Revenue from Contracts with

Customers (cont.)

(Topic 606)

>

Steps in revenue process:

– Step 1: Identify the contract (s) with the customer

– Step 2: Identify the performance obligations within the contract – Step 3: Determine the transaction price

– Step 4: Allocate the transaction price to the performance obligations in the contract

ASU Update 2014-09:

Revenue from Contracts with

Customers (cont.)

(Topic 606)

>

Application to insurance industry

– Non-insurance contracts may integrate services in a single package (administrative services, asset management, custody services etc.)

– Such services may result in new considerations such as:

» New separation criteria that may affect what services are bundled or unbundled and;

ASU Update 2014-09:

Revenue from Contracts with

Customers (cont.)

(Topic 606)

>

Evaluate bundled non-insurance service contracts

against new separation criteria

>

Consider changes necessary for existing systems,

processes and controls

>

Consider whether contract terms should be modified due

ASU 2015-09:

Insurance (Topic 944) –

Disclosures about short-duration

contracts

ASU Update 2015-09:

Disclosures about short-duration

contracts

(Topic 944) – Disclosures about short-duration

contracts

>

Timeline

– Joint project with the IASB in 2008 for comprehensive reform to insurance contract accounting

– In 2013, FASB issued exposure draft on insurance contracts impacting insurers’ accounting for short-duration contracts – February 2014, FASB abandoned project with IASB in favor of

making targeted improvements to U.S. GAAP

>

Based on feedback, FASB decided to retain accounting

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

New disclosure requirements are intended to:

– Increase the transparency of significant estimates made in measuring claim liabilities

– Provide users more information to facilitate their analysis of:

» Nature, timing amount and uncertainty of claim cash flows

>

Impacts all insurance entities that issue short-duration

contracts pursuant to ASC 944

>

Effective for public companies for annual periods after

December 15, 2015

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

Incurred and paid claims development information by

accident year on a net basis after risk mitigation

reinsurance, for the number of years for which claims incurred typically remain outstanding (need to exceed 10 years)

>

A reconciliation of incurred and paid claims development

information to the aggregate carrying amount of the

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

The total of incurred-but-not-reported liabilities plus

expected development on the reported claims included in the liability for unpaid claims and claim adjustment

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

Quantitative information about claim frequency (unless

impracticable to do so) accompanied by qualitative

description of methodologies used for determining claim frequency information (as well as changes to these

methodologies)

>

For all claims, except health insurance claims, the

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

Claims Development Information

– Tabular presentation of undiscounted, incurred and paid claims and allocated claim adjustment expenses by accident year

» 10 years – unless impracticable » Net of reinsurance

>

The sum of incurred but not reported (IBNR) claims

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

(Topic 944) – Disclosures about short-duration

contracts

>

Claim frequency information

– Unless impracticable

– How frequency information is measured

>

Outstanding claims for accident years prior to the years

ASU Update 2015-09:

ASU Update 2015-09:

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

Historical average annual percentage payout

>

The Update mandates that companies that companies

are to disclose the historic average annual payout

percentage of claims, except for health insurance claims, as of the end of the most recent reporting period

>

Users will need to understand that the payout pattern

represents the historical pattern by accident year, which if not necessarily the pattern that might be expected going forward

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

Health insurance considerations

>

Health insurance claims tend to have shorter tails

compared to short-duration policies written by property/casualty insurers

– The historical average annual percentage payout is less useful – Claims development tables will likely be less than the requirement

of 10 years

>

Health insurers are required to disclose incurred but not

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

Health insurance considerations (cont.)

>

In the interim and annual disclosure of the rollforward of

the claim liability, health insurance claims are required to be disaggregated, whereas the rollforward guidance

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

Potential implementation problems

>

Claim frequency

– Claim recognition can be different depending on the company – must be disclosed

– May be presented as a ratio

>

Data

>

Accounting systems will need to be upgraded

– Health insurers are still restructuring their systems for the

ASU Update 2015-09:

Disclosures about short-duration

contracts (cont.)

Potential implementation problems (cont.)

>

Business acquisitions, dispositions, spin-offs, and other

business modifications

>

Foreign operations and exchange rates

>

What level of aggregation is appropriate for development

tables?

Targeted

improvements for

accounting for

long-term contracts

Targeted improvements for

accounting for long-term contracts

>

Periodic Assumption Update

>

Discount rate

>

Accounting for participating Life Insurance Contracts

>

Assumption update methods for Traditional

Long-Duration Contracts, Limited-Pay Contracts, and Participating Life Contracts

>

Premium Deficiency and Loss Recognition

>

Amortization of Deferred Acquisition Costs

Disclosure

The information provided here is of a general nature and is not

intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.

Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of

avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any

limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. © 2015

Baker Tilly Virchow Krause, LLP