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FASB proposes simplifications for measurement-period adjustments

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Contents
FASB issues ASU and exposure draft
     Disclosures about short-duration insurance contracts
     Simplifications for measurement-period adjustments
Highlights of May 21 FASB meeting posted
     Definition of a ‘business’
     Methods for updating assumptions for long-duration insurance contracts
     Not-for-Profit exposure draft educational resources available
FAF
     PIR review of noncontrolling interests concludes standard achieves purpose
     2014 FAF annual report issued
AICPA and NASBA propose amendments to CPE standards



FASB issues ASU and exposure draft

Disclosures about short-duration insurance contracts

On May 21, the FASB issued ASU 2015-09, Financial Services – Insurance: Disclosures about Short-Duration Contracts, to provide additional information about insurance liabilities that will help financial statement users understand the nature, amount, timing, and uncertainty of future cash flows related to insurance liabilities, as well as the effect of those cash flows on the income statement. The ASU applies to insurance entities that issue short-duration contracts (typically one year or less), such as auto, homeowners, renters, and catastrophe insurance.

The main amendments require an insurance entity to

  • Provide “claims development tables” illustrating the amount of claims, net of reinsurance, that the entity has incurred and paid on a disaggregated basis by accident year for the number of years that the claims incurred typically remain outstanding
  • Reconcile the claims development tables to the unpaid claims and claim adjustment expenses liability presented on the balance sheet, separately disclosing reinsurance recoverable on unpaid claims
  • Disclose the incurred-but-not-reported claims, expected development on the reported claims, a description of reserving methodologies, and any changes to the methodologies
  • Provide quantitative information about claim frequency for each accident year presented, if practicable, including a qualitative description of methodologies used to determine the claim frequency
  • Disclose as supplementary information for all claims, except health insurance claims, the average annual percentage payout of incurred claims by age for each accident year presented
  • Provide a rollforward of the liability for unpaid claims and claim adjustment expense in the annual and interim reporting periods

For unpaid claims and claim adjustment expenses reported at present value in annual financial statements, the amendments in ASU 2015-09 require the insurance entity to disclose the following information:

  • For each balance-sheet period presented, the aggregate amount of discount for the time value of money deducted to derive the liability for unpaid claims and claim adjustment expense
  • For each income statement period presented, the amount of interest accretion recognized
  • The line item(s) in the income statement where the entity classifies interest accretion

Public entities must apply the new guidance for annual periods beginning after December 15, 2015 and for interim periods within annual periods beginning after December 15, 2016. All other entities must apply the amendments for annual periods beginning after December 15, 2016 and for interim periods within annual periods beginning after December 15, 2017.

In the year of initial application of ASU 2015-09, an insurance entity need not disclose information about claims that occurred more than five years before the end of the first financial reporting year in which it applies the amendments. For each subsequent year, the entity must provide the information for another year, including the most recent period presented in the balance sheet, but is not required to provide more than 10 years of information.

For more information about ASU 2015-09, refer to FASB In Focus, “Financial Services ─ Insurance: Disclosures about Short-Duration Contracts.”

Simplifications for measurement-period adjustments

On May 21, the FASB also issued a proposed ASU, Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments. The Board requests comments by July 6.

The proposed amendments would require an acquirer to recognize adjustments to provisional amounts identified during the measurement period in the reporting period it determines the adjustment amount. The acquirer would also record the results of any changes to the provisional amounts (for example, changes in depreciation, amortization, or other income effects) in the same period’s financial statements, calculated as if it had completed the accounting at the acquisition date.

The Board proposed that entities apply the amendments prospectively to provisional amounts identified after the effective date of the proposed ASU that are within the measurement period.

The Board will determine the effective date after considering stakeholder feedback on the proposed amendments.



Highlights of May 21 FASB meeting posted

All decisions reached at Board meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

At its meeting on May 21, the FASB discussed the definition of a business and targeted improvements to accounting for long-duration insurance contracts. Highlights of these discussions are featured below.

Definition of a ‘business’

As part of its project to clarify the definition of a business, the Board discussed three related issues:

  • Adding a threshold for when an entity must investigate whether a transferred set of activities meets the definition of a business
  • Developing indicators of when a set of acquired assets and activities includes a substantive process
  • Removing the provision that states that an acquisition need not include all inputs and processes if a market participant would be capable of replacing missing elements

The Board tentatively decided to add a threshold to the guidance that would allow for a transferred set of activities to be considered an asset, as opposed to a business, if a single tangible or identifiable intangible asset or a group of similar assets represents “substantially all” the fair value of the gross assets acquired. The Board directed the staff to develop indicators and examples to describe what constitutes similar assets.

To describe when a set of acquired assets and activities includes a substantive process, the Board tentatively decided to develop a framework for entities to evaluate when inputs and processes together substantively contribute to the ability to create outputs. The tentative framework states that

  • When a set does not have outputs, it would include both of the following in order to have a substantive process:

    - An organized workforce that has the skills, knowledge, or experience necessary to complete one or more acquired processes that are critical to the ability to create outputs

    - Rights or access to inputs that are being, or could be, developed into goods or services that can be provided to customers

  • When a set has outputs, an entity must apply judgment to determine whether the set includes a substantive process. Having outputs is not determinative on its own, and an entity should exclude customer contracts, lists, leases, or other similar arrangements from the determination of whether the set includes a substantive process. When the set includes outputs, either of the following would indicate that the set includes a substantive process:

    - The set includes an organized workforce that has the skills, knowledge, or experience necessary to complete one or more acquired processes that are critical to the ability to create output.

    - The acquired process (or group of acquired processes together) is unique, scarce, or cannot be replaced without significant cost, effort, or delay in the ability to continue producing output.

Finally, the Board tentatively decided to remove the guidance stating that a business need not include all the inputs and processes that the seller used to operate the business if a market participant can replace missing elements and continue to produce outputs. Instead, an entity would apply the framework for determining whether the acquired set has a substantive process.

Methods for updating assumptions for long-duration insurance contracts

The Board discussed the methods that should be used to calculate and record the effect of updating assumptions used in determining the liability for future policy benefits for long-duration contracts and limited-payment contracts. The Board did not make any technical decisions.

Not-for-Profit exposure draft educational resources available

The FASB recently posted an FAQ document to its website for its proposed ASU, Presentation of Financial Statements of Not-for-Profit Entities.



FAF

PIR review of noncontrolling interests concludes standard achieves purpose

On May 20, the Financial Accounting Foundation (FAF) published its post-implementation review (PIR) report of FASB Statement 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of the AICPA’s Accounting Research Bulletin 51. Statement 160 establishes guidance for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary, and is codified in ASC 810, Consolidation. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements because it is an ownership interest in the consolidated organization.

The PIR report concludes that Statement 160

  • Adequately resolves the issues underlying its stated need, which includes eliminating the diversity in reporting noncontrolling interests in the financial statements, providing clear guidance on how to account for changes in a parent’s ownership interest in a subsidiary, and converging the guidance with IFRS
  • Provides investors with useful information
  • Enables information about noncontrolling interests to be reported reliably
  • Does not give rise to unanticipated consequences or result in significant implementation and ongoing compliance costs

The FASB plans to conduct outreach with stakeholders to understand whether any cost-effective solutions exist to address the areas of improvement noted in the PIR report, including the allocation of net income or loss between a parent company and the noncontrolling interest.

The PIR team will soon begin its review of FASB Statement 28, Earnings per Share.

2014 FAF annual report issued

The FAF recently issued its 2014 Annual Report, “Building a Better GAAP.” The report focuses on the strategic plan of the FAF and its standard-setting boards, the FASB and the GASB. The report also provides an overview of the 2014 accomplishments of the FAF, FASB, and GASB.



AICPA and NASBA propose amendments to CPE standards

The AICPA and the National Association of State Boards of Accountancy (NASBA) jointly issued an Exposure Draft, Statement on Standards for Continuing Professional Education (CPE) Programs, that proposes revised definitions for group and internet-based CPE programs to include two new delivery methods: nano-learning and blended learning. The new methods focus on how participants receive the program rather than on how the instructor delivers them.

Nano-learning is defined as a program that delivers information, often on task-specific topics, in a ten-minute timeframe through the use of electronic media without a real-time instructor. Blended learning is defined as a program incorporating multiple learning formats, such as live instruction and on-demand self-study.

Comments are due by October 1, 2015.



© 2015 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.