41 2 3 4 IASB & FASB Insurance contract project Objectives Improve, simplify and converge the financial reporting requirements for insurance contracts1Eliminate numerous pieces of current US accounting literature2Provide a comprehensive insurance standard for IFRS reporting3Provide investors with more decision useful information 4
5Insurance contracts project milestones Sub titleTextEffective date of the final IFRS standard will likely be approximately 3 years after the standard is issued.The IASB staff currently estimate that the issuance date will be late 2014 to early The IASB has stated that it expects the earliest possible effective date to be for annual reporting periods beginning on or after January 1, 2017.The FASB decided not to include a minimum time period between the issuance of the standard & the effective date in its ED, but rather to ask a question about the key drivers affecting the timing of implementation.
6Background and overview Major changes since the 2010 proposalsIASB:re-exposure includes full text of proposed standardlimited questions to avoid re-opening of issuesdoes not intend to revisit other aspects of proposed standard after re-exposureintends to undertake fieldwork during re-exposureTextFASB:has a full exposure draftintends to undertake fieldwork during the exposure periodThe comment period for the exposure drafts ended October 25, 2013.In addition, the ED includes questions on cost/benefit aspects, and the clarity of drafting of the proposals.
8Proposed measurement models Building block 1 – Cash flowsEstimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts the contract belongs to and would:be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money & the risk adjustment)reflect the perspective of the entity (provided that estimates of any relevant market variables do not contradict observable market prices for those variables)incorporate, in an unbiased way, all available information that relates to the cash flows of the contractsbe current, i.e. reflect all available information at the measurement dateinclude only cash flows arising within the boundaries of existing contractsEstimates would be updated each reporting period & measured at a portfolio level of aggregation for insurance contracts.Insurance liability under the building – block approach and the onerous contract liability under premium allocation approach reflects estimates at the reporting date.
9Proposed measurement models Building block 1 – Acquisition costsIncluded in fulfilment cash flows: All directly attributable acquisition costs that can be allocated on a rational and consistent basis to the individual insurance portfolios. Includes also costs that cannot be attributed directly to individual insurance contracts in the portfolio.Acquisition costs incurred before a contract’s coverage period begins would be recognised as part of the measurement of the portfolio of insurance contracts.FASB only - limited to those costs related to successful acquisition effortsIASB only - no distinction between successful and unsuccessful efforts (all direct costs included)FASB lines up with current U.S. GAAP other than eliminating direct response advertising and the transition expedient in ASU
10Example bottom-up and top-down approach Proposed measurement modelsBuilding block 2 – Time value of moneyExample bottom-up and top-down approachFinancial instrument yield of 5.25% (based on actual assets held or a reference portfolio)Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate.In theory, both approaches should result in the same discount rate; however, in practice, differences are expected.Market risk premium for expected credit losses (1%)Market risk premium for unexpected credit losses (.5%)Difference between top-down and bottom up approach (.25%)Liquidity premium (.5%)Risk-free rate 3%Top-down approach:3.75%Bottom-up approach: 3.50%No specific method prescribed.Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity.
11Proposed measurement models Building block 3 – Risk adjustment (IASB only)Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract”If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the inclusion of an explicit risk adjustment would provide relevant information to users. Under the IASB’s approach, the measurement of an insurance contract should contain an explicit risk adjustment.IASB not prescribing a unit of account for measurement of the risk adjustment.IASB not limiting the range of available techniques and related inputs to the risk adjustment.However, if a technique other than confidence level is used, that technique and the equivalent confidence level % would need to be disclosed.Remeasured each reporting period and changes are recognised in profit or loss.Replicating asset approach based on the fair value of the replicating asset may be appropriate.
12Contractual service margin (IASB) Proposed measurement modelsBuilding block 4 – Contractual service margin (IASB only)Contractual service margin (IASB)Single margin (FASB)Arises when the present value of the fulfilment cash flows * is less than zero (i.e. remove day-one gains)If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inceptionRepresents the unearned profit recognised as service is providedProspectively adjusted for changes in estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking)Systematic release over coverage period based on the pattern of transfer of services providedClassified as part of the insurance liabilityInterest accretion using discount rate at inceptionThe single margin would not be re-measured subsequently (no unlocking)Recognises profit as the entity satisfies its performance obligation to the policyholder - i.e. released from exposure to risk as evidenced by a reduction in the variability of cash outflows (usually longer than coverage period)Separate presentation in statement of financial positionInterest accretion using discount rate at inception* defined as the expected present value of the future cash outflows, including pre-coverage cash-flows, less cash inflows plus risk adjustment
13Proposed measurement models The premium allocation approachSimplified measurement approach for some short-duration contracts and similar approach to current practices for non-life contracts.Consistent with revenue recognition proposals.Liability for incurred claims according to BBAApplies when:Reasonable approximation of the building block model; orCoverage period 12 months or lessReasonable approximation when entity expects no significant variability in cash flowsIASB: permitted if criteria met.FASB: required when criteria metLiability for remaining coverage (measured by reference to UEP)Discounted liability for incurred claimsDACOnerous contract liability+=Insurance liability
14Proposed measurement models The premium allocation approachInitial measurement of the liability for remaining coverageLiability for remaining coverageInitial premiumDirectly attributable acquisition costsOnerous contract liability=-+Discounting required if there is a significant financing component using discount rate at inceptionDirectly attributable acquisition costs can be expensed if coverage period is less than 1 yearReleased on a systematic basis representing the transfer of servicesOnerous contract test when facts and circumstances indicate it might be onerousSubsequent measurement of the liability for remaining coveragePrevious carrying amountInterest accretion (at initial rate)Premium received in periodRevenue recognised for coverageChange in onerous contract liability--++
151 2 3 Proposed measurement models The premium allocation approach Liability for claims incurred under the PAA is measured at the fulfilment cash flowsFulfilment cash flowsWhen a liability for incurred claims is discounted - use the discount rate at the inception of the contract to determine the amount of the claims and interest expense in profit and loss.Discounting not required if cash flows are expected to be paid or received in one year less1Unbiased probability-weighted current estimates of future cash flows2Discounted at current rates to reflect the time value of money3Risk adjustment (IASB only)
16Reinsurance Reinsurance assumed IASB - Permits FASB - Requires Evaluate the applicable approach in same manner as a direct contractIASB - PermitsFASB - RequiresEligibility Principle * Contracts eligible if the PAA would produce measurements that are a reasonable approximation of building-block approach.Eligibility Criteria *Apply the BBA rather than the PAA if at contract inception:it is likely that there will be significant variability in the expected value of net cash flows required to fulfil a contract before a claim is incurred.* A contract would qualify automatically under both approaches if coverage period is one year of less
17Presentation Presentation in statement of income and OCI Presentation (an example)Insurance contract revenue475Claims and benefits incurred-320Expenses incurred-60Amortisation of acquisition costs-20Changes in estimates of future cash flows(if not offset against the contractual service margin)-10Unwind of previous changes in estimates5Underwriting result (Gross margin)70Investment income60Interest on insurance liability-54Profit or loss76Other comprehensive income:Change in insurance contract liability due to changes in discount rate9Fair value movements on FVOCI assetsTotal comprehensive income75Insurance contract revenue is allocated to periods in proportion to the value of coverage (and other services) by reference to the estimated pattern of expected claims and expenses.Insurance contract revenue exclude the amounts to be paid to policyholders regardless of whether an insured event occurs (‘the investment component’)
18ASU 2013-01: Disclosures about offsetting assets & liabilities
19Disclosures about offsetting assets & liabilities US GAAP: ASU Disclosures about Offsetting Assets and LiabilitiesStarted as a FASB/IASB joint project.Boards were unable to agree on a converged model for offsetting financial instruments on the balance sheet.FASB and IASB issued new guidance to:–Improve their respective disclosure requirements, and–Allow for better international balance sheet comparability.New disclosures enable users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position.IASB amended IAS 32 and IFRS 7 – IFRS 7 offsetting disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013.
20Disclosures about offsetting assets & liabilities US GAAP: ASU : Clarifying the Scope of Disclosures about Offsetting Assets and LiabilitiesThe FASB clarified the scope of the balance sheet offsetting disclosures through the issuance of the ASU The ASU limits the scope of the disclosures to:Recognized derivative instruments accounted for in accordance with ASC 815, Derivatives and Hedging, including bifurcated embedded derivativesRepurchase agreements and reverse repurchase agreementsSecurities borrowing and securities lending transactionsThat are either:–Offset in the statement of financial position, OR–Subject to an enforceable master netting arrangement or similar agreementASU was issued in January 2013 with the effective date consistent with ASU (must apply retrospectively for annual periods beginning on or after January 1, 2013).
21Disclosures about offsetting assets & liabilities IFRS: Amendments to IAS 32 and IFRS 7 – Offsetting financial assets and financial liabilitiesIASB issued amendments to IAS 32 and IFRS 7 in December 2011Same netting requirements as US GAAP, however, scope broader.IASB Scope applies to:- Financial instruments netted under IAS 32 requirements including due to and from balances / receivables and payables (broader than US), andFinancial instruments subject to enforceable master netting arrangement or similar agreement irrespective of whether they are set off under IAS 32 (e.g. derivatives subject to master netting agreements, repos and reverse repos)The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities will provide the disclosures retrospectively for all comparative periods.
22Disclosures about offsetting assets & liabilities Quantitative information in a tabular format, separately for assets and liabilities.The information required includes:a) The gross amounts of those recognized assets and those recognized liabilitiesb) The amounts offset in accordance with the guidance in ASC and ASC (and IAS 32) to determine the net amounts presented in the statement of financial positionc) The net amounts presented in the statement of financial positiond) The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b)1. The amounts related to recognized financial instruments and other derivative instruments that either:i) Management makes an accounting policy election not to offsetii) Do not meet some or all of the guidance in either ASC or ASC (or IAS 32)2. The amounts related to financial collateral (including cash collateral).e) The net amount after deducting the amounts in (d) from the amounts in (c)
23Disclosures about offsetting assets & liabilities The standard permits flexibility with respect to how certain items are disclosed. For example, companies can choose to disclose items (c) through (e) above either by type of financial instrument or by counterparty. Generally, it is expected that disclosures will be provided in a tabular format. The standard also contains several examples intended to illustrate its application. The examples in the guidance provide the following column headings that can be used in the tabular disclosure.Gross amounts not offset in the statement of financial positionDescriptionGross amounts of recognized assetsGross amounts offset in the statement of financial positionNet amounts of assets presented in the statement of financial positionFinancial InstrumentsCollateralNet amountABC = A - BDaDbE = C - D
24ASU 2013-02: Reporting amounts classified out of other comprehensive income
25ASUReporting Amounts Reclassified Out of Accumulated Other Comprehensive IncomeExpands disclosures for items reclassified out of accumulated other comprehensive income (AOCI).Requires entities to disclose:–For items reclassified out of AOCI and into net income in their entirety, the effect of the reclassification on each affected net income line item; and–For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required US GAAP disclosures.For public companies, effective prospectively for reporting periods beginning after December 15, 2012.Under IFRS, entities report fewer amounts in other comprehensive income, and they are not required to subsequently reclassify all amounts of accumulated other comprehensive income to net income (profit or loss). Under IAS 1, entities must present reclassifications by component of OCI, either in the statement(s) containing profit or loss and other comprehensive income or in the notes to the financial statements. The disclosure requirements under IFRS, however, do not include the specific presentation requirements in this Update.
26ASU 2013-03: Fair value disclosures – clarification 4
27ASU 2013-03 Clarifying Scope of ASU 2011-04 Fair Value Disclosures Update clarified that exemption available under ASU does not apply to non-public entities that have total assets of $100 million or more (or that have one or more derivative instruments)ASU is effectively immediately.This means that any non-public entity having total assets of >$100m or have derivatives are required to disclose:- Fair value hierarchy leveling disclosure for items that are not measured at FV in the BS but for which FV has to be disclosed (e.g.: HTM investments)- Required to disclose transfers between Level 1 and 2- Level 3 qualitative sensitivities
29ASU 2013-07 Liquidation basis of accounting Requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent” unless the liquidation follows a plan for liquidation specified in the entity’s governing documents at inception.“Imminent”: when there is a remote likelihood that the entity will return from liquidation and either of the following occurs:–A liquidation plan has been approved by those with the authority to do so and the likelihood that execution of the plan will be blocked by other parties is remote; or–A liquidation plan is imposed by other forces (e.g. involuntary bankruptcy).Effective prospectively for annual reporting periods (and interim periods therein) beginning after December 15, 2013.
30ASULiquidation basis of accounting – recognition & measurementAssets• Measure and present assets at estimated amount of cash proceeds /other consideration expected to be collected in settling/disposing of those assets.•Include assets previously not recognized but are expected to be sold in liquidation/used in settling liabilities.•Accrue estimated costs to dispose of recognized assets; present accruals in the aggregate, separately from the related assets.•Do not apply discounting in measuring accruals for disposal costs.Liabilities•Recognize and measure liabilities in accordance with US GAAP•Adjust liabilities to reflect changes in assumptions resulting from decision to liquidate (e.g. timing of payments).•Do not anticipate legal release as the primary obligor under those liabilities.
31ASULiquidation basis of accounting – recognition & subsequent measurementOther costsand income• Accrue amounts expected to be incurred or earned (e.g. payroll expense/income from pre-existing orders) through the end of liquidation if and when a reasonable basis for estimation exists.•Do not apply discounting provisions in measuring expected income and expense.At eachreporting date•Remeasure assets, liabilities and accruals for disposal or other costs or income to reflect the actual or estimated change in value since the previous reporting date.
32ASU 2013-07 Liquidation basis of accounting - disclosures At a minimum, an entity shall disclose all of the following:a) That the FS are prepared using the liquidation basis of accounting, including facts and circumstances surrounding the adoption of liquidation basis of accounting and the entity’s determination that liquidation is imminent.b) A description of the entity’s plan for liquidation, including a description of each of the following:1. The manner by which it expects to dispose of its assets and other items it expects to sell that it had not previously recognized as assets (for example, trademarks)2. The manner by which it expects to settle its liabilities3. The expected date by which the entity expects to complete its liquidation.c) The methods and significant assumptions used to measure assets and liabilities, including any subsequent changes to those methods and assumptions.d) The type and amount of costs and income accrued in the statement of net assets in liquidation and the period over which those costs are expected to be paid or income earned.
34Public entity definition FASB issued an Exposure Draft in August 2013 of a proposal that would amend the FASB ASC to include the definition of a public business entity that would apply prospectively to new accounting and reporting standards.Any one of the following criteria would be considered a public business entity:Entity is required by the SEC to file or furnish FS (including other entities whose FS or financial information are required to be or are included in a filing).Entity is required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act, to file or furnish FS with a regulatory agency.Entity is required to file or furnish FS with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities.Entity has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.Entity’s securities are unrestricted, and it is required to provide U.S. GAAP FS to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.A consolidated subsidiary of a public company would not be considered a public business entity for purposes of its standalone FS other than those included in an SEC filing by its parent /by other registrants. Some of the existing definitions of a public entity in the ASC consider a consolidated subsidiary of a public company to be public e.g. ASC 820 on FV (ASU ).
36Going concern Proposal - FASB FASB received input indicating that the lack of guidance in U.S. GAAP and the varying interpretations of when and how going concern uncertainties should be disclosed under the auditing standards result in diversity in the timing, nature, and extent of existing footnote disclosures.The proposal is intended to provide preparers with guidance in U.S. GAAP on management’s responsibilities for evaluating and disclosing going concern uncertainties to reduce existing diversity in disclosures.An organization would determine the need for disclosures by assessing the likelihood that the organization would be unable to meet its obligations as they become due within 24 months after the financial statement date.
38Investment Disclosure Reminders ASU Use of Net Asset ValuesPermitted to fair value an investment in a pooled investment fund using NAVWhen the investment does not have a readily determinable fair value (defined as):The fair value of an investment in a mutual fund is readily determinable if the fair value per share/unit is determined and published and is the basis for current transactions.Generally interpreted as SEC-registered mutual fundsWhen Practical Expedient is used, other disclosures required, by major category:Fair valueSignificant investment strategiesNormal redemption termsLiquidity restrictions (e.g. side pockets, lock-ups, gates)HierarchyLevel 2 – if company can redeem at NAV in near termLevel 3 – if company cannot redeem at NAV in near term
39Investment Disclosure Reminders ASU – Fair Value Measurements & DisclosuresDisclose separately the amounts of transfers in and out of Level 1 and 2 and explain reasonsDisclose valuation techniques and inputs used in Level 2 and 3 fair value measurementsFair value hierarchy table and Level 3 roll-forward table to be disaggregated by major security typesMajor security types shall be based on the nature and risks of the security and shall consider:Shared activity or business sectorVintageGeographic concentrationCredit qualityEconomic characteristicLevel 3 roll-forward to separately disclose purchases, sales, issuances and settlements (gross basis)
41Investment Disclosure Reminders ASU – Fair Value MeasurementQuantitative disclosures of unobservable inputs used in fair value measurementse.g. Residential MBS (prepayment rate, probability of default, loss severity)Not required to disclose if entity does not use unobservable inputs (uses 3rd party pricing)Not required to disclose unobservable inputs if entity uses the practical expedient (i.e. NAV)For Level 3 investments:Description of valuation process in place and how entity decides its valuation policiesInformation about sensitivity of level 3 FV measurement to changes in unobservable inputs (Non-public entities are exempt from this provision)For items not measured at FV in balance sheet but for which FV is required to be disclosed (e.g. HTM investments carried at amortized cost), the FV hierarchy categorization (i.e. Level 1, 2, or 3) (Non-public entities are exempt from this provision)Other non-public entity exemptions:Information about transfers between Level 1 and Level 2 of the fair value hierarchy
42Investment Disclosure Reminders ASC 320 – Available-for-sale investmentsOther than temporary impairment assessment (OTTI)Equity – intent and ability to retain investment for sufficient time to allow for anticipated recovery in valueDebt – if intends to sell or may be required to sell the security before recovery of its amortized cost basis, or if there is a credit lossAdditional Disclosures:CostFVGross unrealized gains, gross unrealized lossesMaturity informationFor investments in URL position, aggregate FV, number of positions, cause of impairment, severity and duration of impairment, split by < > 12 monthsProceeds from sale, gross realized gains, gross realized losses