Emerging Accounting Issues and Statutory Accounting Principles Working Group Update

The Emerging Accounting Issues Working Group (EAIWG) and Statutory Accounting Principles Working Group (SAPWG) held a joint meeting on Saturday, April 6, 2013, during the NAIC Spring 2013 National Meeting.

The Emerging Accounting Issues Working Group (EAIWG) continues to enjoy a reduced backlog and very few items were discussed. During the meeting, one previously exposed item was adopted with no comments received from interested parties. The task force adopted the “2005-2009” INTs for inclusion into the Statement of Statutory Accounting Principles (SSAPs). This item completes the merger of the proposed interpretations into guidance included in the SSAPs, as well as interpretations proposed to be retained within the NAIC Accounting Practices and Procedures Manual (AP&P).

As all applicable INTs have been now adopted, the task force will now start looking at improving INT references in existing SSAPs. As part of this project, the task force will recommend eliminating pages from existing SSAPs where guidance has been superseded by other accounting guidance. You can submit comments regarding this proposal until May 31, 2013.

Adopted Items

The Statutory Accounting Principles Working Group (SAPWG) adopted a non-substantive revision to SSAP No. 26 – Bonds, Excluding Loan-backed and Structured Securities (SAPWG 2013-01). The revision updated the accounting guidance for the measurement and reporting of mandatory convertible securities. The updated SSAP now reads that these securities should be reported on the balance sheet at the lower of fair value or amortized cost during the period prior to conversion. In addition, the task force sent a referral to the Blanks Working Group to add a new bond characteristic code to the Schedule D to identify mandatory convertible securities.

The working group also adopted SAPWG 2012-30, which includes non-substantive changes to SSAP No. 30 Investments in Common Stock and SSAP No. 32 Investments in Preferred Stock. This proposal adds a new class of preferred stocks – Exchange Traded Funds. This change was previously adopted by the Valuation of Securities Task Force in 2012.

A decision on the Working Capital Finance Investments proposed Issue Paper and draft SSAP (SAPWG 2013-10) was postponed, pending further discussion on another conference call. Regulators still have several questions on this item before voting to allow the investment as an admitted asset. As the previous comment deadline was March 26, 2013, regulators asked for additional time to consider this and have tentatively scheduled a May 2013 conference call.

The task force adopted SAPWG 2012-24, which includes non-substantive changes to SSAP No. 86 –Accounting for Derivatives and Hedging Activities. This change clarified that hedging transactions meeting hedge effectiveness criteria can follow fair value hedge accounting if elected by the reporting insurance company.¹

Exposed Items

The SAPWG exposed 2013-11, Accounting Disclosures for Restricted Assets. This proposal was introduced on March 6, 2013, during the Restricted Asset Subgroup call. They discussed the desire to capture more information regarding restricted assets in the notes to the financial statements for both annual and quarterly reporting. As part of this initiative, industry should expect new investment disclosures and modifications of some existing requirements, including a more detailed list of “Codes” on the Schedule D Part 1 report. While no exact action was taken at the meeting, regulators did note that they are targeting to complete the data capture portion of this project by the end of 2013 and have opened a comment period that ends on April 26, 2013. As this group continues their work, insurance companies will need to start evaluating any impact to 2013 reporting requirements.

The Restricted Assets Subgroup reported their initial call on March 6, 2013. During the call they prioritized their projects and reported that they will begin discussing transactions with the Federal Home Loan Banks on a conference call schedule to take place on April 29, 2013.

During the SAPWG Meeting, the task force moved SAPWG 2013-13, Derivative Investment Reporting Subgroup Referrals, to the substantive active listing and exposed the concept revisions for a comment period ending May 31, 2013. The need for changes is a consequence of new legislation from the Dodd-Frank Act that will result in different accounting requirements. This agenda item includes:

• Changes to treatment of variation margin as collateral or cash settlement
• Treatment of change in variation margin for future contracts