There were several items of interest that came from the Statutory Accounting Principles Working Group at the summer meeting of the National Association of Insurance Commissioners (NAIC). These include SSAP No. 35R - guaranty fund and other assessments, Issue paper No. 146 - share-based payments with non-employees, and the new SSAP regarding working capital finance investments.
SSAP No. 35R - Guaranty Fund and Other Assessments
The Statutory Accounting Principles Working Group (the working group or SAPWG) readdressed accounting issues for the application of Section 9010 of the Patient Protection and Affordable Care Act (ACA) at the Summer 2013 NAIC meeting in Indianapolis, IN. Statement on Statutory Accounting Principle No. 35R - Guaranty Fund and Other Assessments (SSAP 35R) was originally exposed in March 2013 and required full accrual and expensing of the 2014 ACA liability and full accrual of the 2015 liability for year ended December 31, 2014. Expense recognition for subsequent payments of the fee would be phased in for three years. However, a significant amount of comment letters were received in disagreement with the proposal citing that the fees for any given year are a cost of doing business in that year, and should be recognized as an expense over the course of that year, forcing the working group to readdress this issue.
On August 7, 2013, the working group voted to reject the draft exposure and the working group was directed to draft a new exposure based on the Accounting Principles Generally Accepted in the United States (GAAP) method per Accounting Standards Codification 405-30 - Insurance Related Assessments (ASC 405).
On August 24, 2013, the working group voted to expose the new draft, which was a modification of ASC 405. Under the new exposure draft, the entity will record an ACA liability and a nonadmitted deferred expense on January 1 of the fee year. The nonadmitted deferred expense would be amortized to expense on a monthly basis in the Taxes, Licenses and Fees category. The liability will be estimated based on the ratio of the amount of an entity’s subject net health premiums written during the preceding calendar year (data year) to the amount of subject health insurance written by all subject US health insurance providers during the preceding calendar year.
The fee year is defined as "the calendar year in which the assessment must be paid to the US Treasury;" and the data year as "the calendar year immediately before the fee year," i.e., 2013 is the data year for fee year 2014. A liability is not recognized in the data year; however, the reporting entity will be required to segregate a portion of special surplus from unassigned surplus equal to the estimated subsequent fee-year assessment. The special surplus would then be reversed when the fee-year liability is accrued.
On August 25, 2013, the Accounting Practices and Procedures Task Force voted to expose SSAP 35R with a comment letter due date of November 9, 2013 and an estimated effective date of January 1, 2014.
Issue Paper No. 146 - Share-Based Payments with Non-Employees
Current Statements of Statutory Accounting Principles (SSAPs) address share-based payments to employees in SSAP No. 104 - Share-Based Payments (SSAP 104); however, share-based payments to non-employees are not currently addressed. Issue Paper No. 146 introduces significant changes to SSAP 104 to include a modification of Accounting Principles Generally Accepted in the United States (GAAP) Accounting Standards Codification 505-50 - Equity-Based Payment to Non-Employees (ASC 505).
ASC 505 requires the entity granting the share based payment to non-employees to recognize the fair value of the share-based payment in the same period and in the same manner as if the grantor had paid cash for the goods or services received. The issue paper adopted ASC 505 with the following modifications:
- Any prepaid assets resulting from the share-based payment to a non-employee would be considered nonadmitted in accordance with SSAP No. 29 - Prepaid Expense.
- The issue paper specifically excludes the use of the minimum value method when determining the fair value of the non-employee awards for both nonpublic and public companies. Whereas, ASC 505 indicates that this is not an acceptable method for nonpublic entities.
- When determining the expected costs based on different possible outcomes the amount recognized as expense should be management’s best estimate. If an amount within a range of possible outcomes cannot be deemed a better estimate, in accordance with SSAP No. 5R - Liabilities, Contingencies and impairments of Assets, the midpoint of the range shall be recognized. According to ASC 450 – Contingencies, it is required to record the minimum amount in the range.
A nonadmitted prepaid asset may need to be recognized. These transactions should be measured at the fair value of the consideration received or the fair value of the share-based payment, whichever is more reliable.
The proposed changes would be effective prospectively for years beginning January 1, 2014.
Structured Securities - SSAP No. 43R, Loan Backed and Structured Securities (SSAP No. 43R)
The SAPWG adopted previous exposed revisions to SSAP No. 43R related to interim financial statement reporting instructions for commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS). Current year acquisitions of CMBS or RMBS for which insurers did not have prior year financial modeling information can be valued for interim financial statements using alternative analytical review methods for non-financial modeled securities.
The SAPWG also exposed revisions to SSAP No. 43R that would reduce the current disclosure requirement for all applicable securities held where a credit loss other-than-temporary impairment has previously been recognized. The revisions suggest that the disclosure be limited to those securities where there has been current year credit loss other-than temporary impairment activity. The deadline for comments on the exposure is October 10, 2013.
New SSAP regarding Working Capital Finance Investments
The proposed Statement of Statutory Accounting Principle (SSAP) No. 10X - Working Capital Finance Investments (SSAP 10X) amends SSAP No. 20 - Nonadmitted Assets to allow working capital finance investments as an admitted asset. A working capital finance investment is an interest in future payments to be received from a confirmed supplier receivable that was issued pursuant to a working capital finance program. A working capital finance program is an open account program under which an investor may purchase interests, or evidence thereof, in commercial non-insurance receivables. In order for the working capital finance investment to be considered an admitted asset the following must be true:
- The working capital finance program in which the asset was purchased must be designated as a 1 or 2 by the NAIC Securities Valuation Office,
- The working capital finance program must provide:
- an annual audit of the consolidated financial statements of the finance agent which does not report any qualification relating to servicing, and
- an annual independent Service Organization Control (SOC) Report in accordance with Statement on Standards for Attestation Engagement (SSAE) No. 16 or an annual audit of the internal controls of the consolidated group of which the finance agent is part, which does not note any material weaknesses related to servicing, and
- The payment (maturity) date must not exceed one year from the date of invoice from the supplier to the obligor.
If the preceding requirements are not met, the reporting entity is required to record the investment as a nonadmitted asset. Working capital finance investments exclude any receivables financed through the following: factoring, forfeiting, or invoice discounting.
Working capital finance investments will be required to be reported as other invested assets. The asset will be originally reported at cost excluding any fees associated to the purchase of the asset, which would be expensed as incurred. After the initial acquisition, the investment should be reported at amortized cost. If the investment is purchased at a premium, the difference between the cost of the investment and the amount receivable under the confirmed supplier receivable is required to be expensed immediately.
The Accounting Practices and Procedures Task Force exposed SSAP 10X on August 25, 2013, and the comment deadline was September 13, 2013. The proposed effective date of SSAP 10X is December 31, 2013.
Other SAPWG Activity
An informational exposure period was requested for all parties to provide additional information and recommendations for statutory accounting guidance regarding clarification of the definition of a “tax position” within SSAP No. 101, Income Taxes, A Replacement of SSAP No. 10 and SSAP No. 10R, and the inclusion of guidance regarding the settlement and effective settlement of tax positions within SSAP No. 5R, Liabilities, Contingencies, and Impairments of Assets.
The SAPWG emphasized priority items prior to the 2013 NAIC Fall National Meeting will include exposing language related to the reinsurance programs, risk corridors and risk adjustment that are part of the ACA, and for the working group to develop comment letters on the Financial Accounting Standards Board’s (FASB) June 2013 exposure draft related to insurance contracts.
Blanks Working Group (BWG)
During its 2013 Summer Meeting, the BWG deferred a proposal that would potentially eliminate the Reinsurance Attestation Supplement from the Annual Statement Instructions until additional information was available resulting from work currently being performed by the Reinsurance Task Force’s related to the Matter.
The BWG also adopted a previous proposal to expand information required in the Supplemental Compensation Exhibit to the NAIC Annual Statement, which will become effective for the year ending December 31, 2014. The additional information to be required includes stock, share-based and other compensation paid to directors and officers, and a narrative description of any material factors necessary to understand the overall compensation amount being disclosed. Interested parties were in favor of a deferral of this proposal so that any potential changes to the Supplemental Compensation Exhibit would be concurrent and align with the corporate governance model law being developed by the Corporate Governance Working Group.
Corporate Governance Working Group (CGWG)
The CGWG reviewed the proposed Corporate Governance Annual Filing Model Act developed and presented by interested parties in response to the initial structure of a model act previously proposed by the CGWG. The proposed model act by interested parties included strong confidentiality language with respect to the proprietary information expected to be included in the filings pursuant to the eventual model act.
The working group also formed an Internal Audit Subgroup to continue development of revisions to the Annual Financial Reporting Model Regulation which would make it a requirement for larger insurers to maintain an effective internal audit department.
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