IASA Carolinas Summer Conference

US GAAP Update

Agenda

Introduction1. FASB Update2. Insurance – new guidance and changes on the horizon3. Leases – new guidance

Speakers Today

Chris Myers, Director

Atlanta, GA

Chris is a Director within PwC's Capital Markets & Accounting Advisory Services practice. He has over 11 years of experience in delivering audit and assurance services exclusively to life insurance clients, both public and private. Chris has acquired technical expertise in the areas of US GAAP, statutory, and US Securities and Exchange Commission reporting and internal control assessments. Chris also has experience in assisting insurance clients with becoming public companies including IFRS to GAAP conversions, IPO readiness assessments, and financial close process evaluations. He has also assisted clients with accounting advice regarding impact assessments for IASB/FASB convergence (e.g. Insurance Contracts), purchase accounting, and the evaluation of accounting for complex transactions.

Melissa Kehoe, Director

Charlotte, NC

Melissa is a Director within PwC’s Capital Markets & Accounting Advisory Services practice. She has nine years of experience at PwC providing assurance and advisory services to clients in multiple jurisdictions and across multiple industries, including industrial products, pharmaceutical, entertainment and media, retail and consumer and energy and utilities. Melissa’s experience includes working with PwC in Portland, Oregon and Sydney, Australia. Melissa is an accounting and financial reporting advisor on complex accounting transactions, specifically as it relates to hedge accounting, revenue recognition, leasing and business combinations under both US GAAP and IFRS. Melissa has also advised various clients with cross border transactions including initial public offerings, debt offerings, and acquisitions and accounting conversion projects from IFRS to US GAAP.

FASB Update

1

FASB PrioritiesAn active environment• Major projects

Complete remaining “convergence-era” projects in the first half of 2016 (Leases & Financial Instruments)

• 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 Tackle current agenda efficiently and identify priorities for the future agenda

“Developing the right solutions means identifying the right problems.”

FASB Chairman, Russ Golden

Standards effective in 2016

Effective in 2016Consolidation – amendments to “VIE” and “Voting” models

Cloud computing - customer’s accounting

Measurement period adjustments – no longer pushed back to opening balance sheetGoing concern - management’s assessment and disclosures

Debt issuance costs – balance sheet classification as a reduction of debt vs. assetExtraordinary items – concept eliminated

Share-based payments – accounting for performance targets achievable after vestingInvestments measured at NAV – disclosure of FV information

Insurance – short-duration contract disclosure

Pension plans - measurement date expedient

Standards effective in 2017 or later

Effective in 2017 or later Effective date*

Early adoption

Inventory measurement – lower of cost and NRV 2017 Yes

Deferred income taxes – BS classification 2017 Yes

Equity method - simplifying transition 2017 Yes

Stock-based comp – various simplifications 2017 Yes

Derivatives – accounting for contract novations 2017 Yes

Derivatives - contingent put/call in debt instrument 2017 Yes

Revenue – new converged standard (amendments) 2018 2017**

Liabilities - breakage for stored-value cards 2018 Yes

Financial Instruments – Recognition & measurement 2018 No

Leases – new standard 2019 Yes

*For calendar year-end public entities **Early adoption can be no earlier than 2017

Current technical agenda - Active FASB projects

Project Impact Status

Financial Instruments—Impairment

• Shift from incurred loss model to an expected loss model for financial assets held at amortized cost

• Debt securities classified as AFS to follow a modified OTTI model

Final standard expected Q2 2016

Financial Instruments—Hedging

• Targeted amendments to several aspects of hedge accounting guidance

• Goal is to better align hedge accounting with risk management objectives and reduce complexity

Exposure draft expected in Q2 2016

Insurance • Enhanced disclosures for short-duration contracts

• Targeted changes for long-duration contracts

Short-duration: issued Q2 2015Long-duration: expected in 2016

Current technical agenda - Active FASB projects

Project Impact Status

Definition of a business

• Clarify distinction between a business and a group of assets and the accounting for the sale of nonfinancial assets

Various

Goodwill and intangibles

• Simplify accounting for goodwill and certain intangible assets for public business entities and not-for-profit entities

Various

Liabilities vs. equity –targeted improvements

• Improving and clarifying guidance related to financial instruments with characteristics of liabilities and equity

Exposure draft expected in 2016

Current technical agenda - Active FASB projects

Project Impact Status

Government grants • New disclosure requirements related to arrangements providing government assistance

Exposure draft re-deliberations

Financial statements for non-profit entities

• Significant changes to not-for-profit financial reporting model

Exposure draft re-deliberations

Disclosure framework

• Objective is to improve the effectiveness of footnote disclosures

• Addresses Board’s decision process, entities’ decision process and various topic-specific disclosures

Various

Conceptual framework

• Improved conceptual framework to use in developing future accounting standards

Initial deliberations

Simplification projects

Simplification initiativeFASB is focused on identifying areas of U.S. GAAP where it can reduce cost and complexity while maintaining or improving the usefulness of the information

Recently finalized and issued

• Extraordinary items• Debt issuance costs• Pension measurement date

• Inventory measurement• Measurement period adjustments• Deferred tax classification on balance

sheet• Transition to equity method

• Stock-based compensationOn the horizon• Income taxes – Exposure Draft (ED)

• Classification of debt

Private Company Council (PCC) overview

• Several private company accounting alternatives finalized in 2014

• More recently, PCC’s role has been moving closer to one of an advisory body for the FASB

PCC alternatives finalized•Goodwill•Hedge accounting•VIE – related party leasing•Intangible assets•Transition to PCC alternativesCurrent activities• Assisting FASB with

simplification projects• Advising FASB on other

projects• Partnership accounting

Insurance – new guidance and changes on the horizon

2

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: Potential targeted

accounting changes for long duration contracts; exposure draft possible in 2016

Enhanced disclosures for claim liabilities and targeted improvements to the accounting for long duration insurance contracts.

Improve and simplify the financial reporting requirements

Talking theory

Getting feedback

Coming soon

Short duration overview

Who is impacted?• Insurance entities that issue US GAAP financial statements, both public and

non-public entities.• With the exception of the claim liability rollforward guidance, the additional

disclosures pertain to short-duration insurance contracts only• Health insurance contracts:

◦ Historical average annual percentage payout is not required◦ IBNR+ is required in both interim and annual financial statements◦ Rollforward disclosure must be disaggregated

Short duration/claim liability enhanced disclosuresShort duration contracts:

• Disaggregated claims development tables and related information, for most recent balance sheet, including:• Tabular presentation of undiscounted, incurred and paid claims and allocated

claim adjustment expenses by accident year, on a net basis, for up to 10 years;• The sum of IBNR claims liabilities plus expected development on reported

claims included within the incurred claims development tables, and a description of the estimation methodologies for these components;

• Cumulative claim frequency information for each accident year; and• Reconciliation of the claims development tables to the balance sheet claim

liabilities for the most recent balance sheet

• Historical average annual percentage payout of incurred claims (not required for health claims)

• Information regarding any loss reserves that have been discounted (carrying amount, discount amount, P/L interest accretion amount and line item classification)

• Significant changes in methodologies and assumptions

Short and long duration contracts:

• Tabular interim (year to date) claim liability rollforward (disaggregated for health claims) in addition to currently required annual rollforward

Required disclosures – Incurred and paid claims development tables example

The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

Required disclosures – Incurred and paid claims development tables example (continued)

The FASB material included above is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

Example – reconciliation of claims development tables to the claims liability

Excerpt from ASC 944-40-55-9E: copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, and is reproduced with permission.

Reconciliation of the Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claims Adjustment Expenses

De ce mbe r 31, 2016

Net Outstanding LiabilitiesHomeowners' InsuranceOther short-duration insurance lines

40,5501,976

$

Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance 42,526

Reinsurance recoverable on unpaid claimsHomeowners' InsuranceOther short-duration insurance lines

13,880283

Total reinsurance recoverable on unpaid claims 14,163

Insurance lines other than short-duration Unallocated claims adjustment expenses Other

3,3152,420

105,745

Total gross liability for unpaid claims and claim adjustment expense 62,434$

When is it effective?Adoption• Effective date for public business entities: annual reporting periods

beginning after December 15, 2015 (i.e., year end 2016 for calendar year entities), and interim reporting periods thereafter.

• Non-public business entities: one year deferral (i.e., 2017 for calendar year end entities).

• Early application is permitted.

Transition• Upon transition, the claims development table need not exceed five years

if presenting prior years’ information is deemed impractical. An additional year should be added to the disclosure in each subsequent year of financial reporting, but need not exceed 10 years.

Where to find additional information• US2015-10: FASB issues enhanced disclosure guidance for insurer claim liabilities

FASB targeted improvements – long durationProposed targeted improvements

• Annual (or more) updating of cash flow assumptions, with retrospective unlocking, for liability for future policy benefits

• Revised participating life model; future cash flows would include dividends

• Quarterly update of discount rate assumptions through OCI• Discount rate = rate of return on reference portfolio of

high-quality fixed income investments (proxy liability rate) vs. “expected investment yield” used today

• Simplified DAC amortization:• Based on insurance in-force, (or straight-line based on #

of contracts outstanding as practical expedient)• No interest accretion

• All GMXBs at fair value if other-than-nominal capital market risk; “own credit risk” adjustment through OCI

• Detailed rollforwards of disaggregated liabilities and DAC; qualitative and quantitative information about estimates

• Retrospective transition for liabilities; prospective for DACPwC

FASB may issue an ED in Q3 2016

We anticipate mixed reaction from constituents

What are the next steps

Looking forward• Given the significant nature of the proposed changes, the Board

decided that the proposed targeted changes would be exposed for public comment

• Issuance of the exposure draft is expected in the second half of 2016

Where to find additional informationPwC - FASB / IASB Insurance Contracts Project

Leases– new guidance

3

Overview of the New Lease Standard

• ScopeEmbedded leases

• LesseeRecognize right-of-use asset and lease liability for almost all lease contracts Exemption provided for short-term leases (12 months or less) for lessees

• LessorAccounting model stays substantially the same

• Effective January 1, 2019 for calendar-year public companies (2020 for non-public filers)

KEY CHANGESImprove and simplify the financial reporting for lessees

Create a model that provides a faithful representation of leasing transactions for both lessees and lessors

The new standard at a glance (lessee’s perspective)

Balance sheet• Virtually all leases coming on

balance sheet• Asset & obligation (similar to

today’s capital leases)

P&L• Dual recognition model for US

GAAP• Interest & amortization vs.

single lease expense

Disclosures• Enhanced qualitative &

quantitative disclosures required

Transition• Modified retrospective

approach required• Specified reliefs available

(must elect as package)

What are the main changes

An identified asset The right to control use of the asset during the term

Is explicitly or implicitly specified

Supplier has no practical ability to substitute or would not economically benefit from substituting

Decision-making authority over the use of the asset

The ability to obtain substantially all economic benefits from the use of the asset

Lease may be present in a contract if the contract includes both:

Identifying a lease

• Separate lease components from nonlease components• Allocate the consideration on a relative standalone basis• Increase the use of observable standalone prices• May elect not to separate the nonlease component for a given class of

underlying assets and account for the whole contract as a lease (accounting policy)

LESSEE

• Allocate the transaction price to separate performance obligations (aligned with the revenue standard)

LESSOR

Separating lease and non-lease components

Lessee Balance sheet Income statement Cash flow statement

Finance

Operating

Sales/Direct Financing

Operating

Lessor Balance sheet Income statement Cash flow statement

Right-of-useasset

Lease liability

Front loaded • Amortization expense• Interest expense

Lease expense

Interest = OperatingVariable = OperatingPrincipal = Financing

Operating

• Lease receivable • Unguaranteed

residual • Deferred

profit (DFL)• Underlying asset

remains

Front loaded• Interest income on

receivable and residual • Profit (immediate

or deferred)Lease income

Operating

Operating

Overview- How it works

If a lease meets any of the following 5 conditions, it may be a finance lease:

Transfer of ownership

Option to purchase is reasonably certain

Lease term is a “major part” of the economic life

Present value of lease payments is “substantially all” of the fair value

Specialized nature

Lease Classification

Summary of Lessee’s potential financial statement impact

Build-to-suit (BTS)• No more prescriptive BTS guidance• Transition guidance for existing failed

BTS transactions

Sale-leasebacks (SLB)• Use ASC 606 to determine whether sale

has occurred• No sale if leaseback classified as finance

lease• Symmetrical buyer-seller treatment

Lease modifications• Specific guidance for determining mod

vs. new lease • Guidance on how to account for mods

Combining contracts• Specified guidance for determining

when to combine contracts (similar to ASC 606)

Lease accounting overhaul- Other areas of impact

• Effective January 1, 2019 for calendar-year public companies• Other entities have an additional year for annual filings• Early adoption permitted

ADOPTION DATE

• Modified retrospective approach• May apply hindsight to existing leases to determine lease term and asset impairment • Change in classification (between operating and capital / finance)

TRANSITION METHOD

• 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

RELIEF PACKAGE

Effective date and transition

No need to reassess:

**These reliefs must be elected

as a package

• Whether expired or existing contracts contain a lease

• Classification of expired or existing leases• Amount of IDCs for existing leases

Can also elect to use hindsight when determining the following (with or without electing the package reliefs above):• Determining the lease term• Exercise / non-exercise of extension, termination, & purchase options

Lease accounting overhaul- Practical Expedients

2019201820172016

Comparative reporting periodsFinal

standardEffective

date

Current standardFinancialreporting:

New standard

Dual reporting (US GAAP)

Lease timeline

What are others thinking?

Overview of the survey:

• PwC and CBRE collected responses through an open, online survey between March and April of 2016.

• Responses from more than 500 executives responsible for lease accounting or lease management.

• More than 75% of respondents were CFOs, controllers or finance directors/managers.

• Responses across industries (see chart).

Potential impact and level of effort ahead:How significant is your lease portfolio?

• 40% lease >100 real estate assets 11% lease >1,000

• 64% lease >1 million square feet of real estate

• 56% own less than half of their real estate portfolio

• 54% lease >100 non-real estate assets 21% lease >1,000

• 69% have >75% of leases based in the US

Overview of the survey

Familiar with the standard? 21% indicated they are very familiar while 79% are either somewhat or not familiar with the new standard.

Ready, set, go on transition?Over 50% of respondents are still evaluating whether they will elect the transition provisions in the new standard.

Implementation challenges facing companies

Thank you

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