Accounting Standard Updates

NAIC SAPWG November 12, 2020, Fall Meeting Highlights – Non-substantive Adoptions

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Hot Take:

Hot Take

On November 12, 2020, the Statutory Accounting Principles Working Group (SAPWG) conducted its 2020 Fall National Meeting via virtual communication. SAPWG made several administrative, editorial decisions and six non-substantive adoptions during its meeting. Further, several topics were placed on the list to be exposed. In this summary, we highlight the non-substantive adoptions and will discuss other decisions in a follow-up article.

Full Article

Selected Non-substantive Adoptions:


# 2020-17 – Updating the SCA Review Process
During the July SAPWG meetings, the Working Group proposed administrative updates to the current SCA filing review process required under SSAP No. 97—Investments in Subsidiary, Controlled and Affiliated Entities. The planned edits eliminate many of the labor-intensive steps required to communicate the results of each reviewed SCA. Adoption of the proposed procedures will produce significant savings of manual administrative effort. The proposed change will be effective on January 1, 2021.


# 2020-18 – SSAP 97 Update
This agenda item makes a minor revision to the end of paragraph 9 of SSAP 97 to corroborate the revisions adopted in agenda item 2018-26 and remove a remaining reference that guarantees or commitments can result in a negative equity value for the SCA. Original agenda item 2018-26 contained guidance to state that reported equity-method losses of an investment in a subsidiary controlled or affiliated entity (SCA) would not create a negative value in the SCA investment, thus ending the reporting of the equity method losses at zero. Further, to the degree there was a financial guarantee or commitment, it would require proper recognition under SSAP No. 5R—Liabilities, Contingencies and Impairment of Assets. 


# 2020-19 – Clarifying Edits – Participation in Mortgages
The recommendation was made and approved by SAPWG to adopt non-substantive revisions to SSAP No. 37—Mortgage Loans. The modifications explain that a participant’s financial rights may include the option to initiate litigation against the debtor. Still, they do not necessitate that the participant has the right to exclusively initiate litigation, foreclosure, or under ordinary circumstances, require the ability to communicate directly with the borrower.


# 2020-20 – Disclosure of Rolled Cash Equivalent Investments
Under Statement of Statutory Accounting Principles (SSAP) No. 2R—Cash, Cash Equivalents, Drafts and Short-Term Investments, the adopted modifications require disclosure of cash equivalents that remain on the same reporting schedule for more than one successive reporting period and further clarify that the disclosure is met through the use of the specified identifier code on the investment schedule of the statutory financial statements (i.e., not required in a narrative format).


# 2020-21 – SSAP No. 43R – Loan-Backed and Structured Securities
Modifications are intended to update the financial modeling and mapping instructions for residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS) to safeguard consistency with direction recently adopted in the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual).


A bit of background on this revision:
Originated from the Valuation of Securities (E) Task Force referral, whereby agenda item 2018-19 removed the multi-step designation guidance for modified filing exempt (MFE) securities.  You will recall the MFE elimination became operative on March 31, 2019 (early adoption was permitted to 2018). With its removal, the NAIC designations as reported should now agree to the CRP rating, without adjustment, based on carrying value. Consequently, in SAPWG agenda item 2018-03, it was noted that securities acquired in lots were not to be reported with weighted average designations. Still, if a SSAP No. 43R security (by CUSIP) had a different NAIC designation by purchase lot, the reporting entity is now required to either 1) report the aggregate investment with the lowest applicable NAIC designation, or 2) report the investment separately by individual lot on the investment schedule. If the entity is reporting it separately, the investment is allowed to be aggregated by NAIC designation. Under the MFE elimination process, the cases of different designations by lot are expected to be minimal.  However, the potential exists that it could still arise within the financial modeling method for RMBS and CMBS securities.


# 2020-23 – Leasehold Improvements
Background – SAPWG adopted substantive revisions in 2019 to SSAP No. 22R—Leases, rejecting the financing lease concept that has been previously implemented in U.S. GAAP under ASC Topic 842; however, in doing so, the Working Group desired to keep SSAP No. 22R as consistent as possible with U.S. GAAP through the utilization of as much of the GAAP disclosure language as possible. This was done with the intent of retaining the operating lease notion under statutory accounting. During July 2020, SAPWG exposed proposals to update the guidance for leasehold improvement depreciation lives in SSAP No. 19—Furniture, Fixtures, Equipment and Leasehold Improvements and SSAP No. 73—Health Care Delivery Assets and Leasehold Improvements in Health Care Facilities. This was purposed to mirror adopted guidance regarding the definition of lease terms in SSAP No. 22R. SAPWG approved the NAIC staff recommendation without further discussion.


So, what’s the rub?
There is not much to report here other than these items are general reference adjustments/revisions to keep in mind when performing your statutory accounting duties in the upcoming reporting period.


Parting Comments:
The SAPWG exposed a number of non-substantive revisions to statutory accounting guidance that we have not elaborated upon in this discussion, primarily to give time for their evolution and allow for NAIC staff time to develop additional material and accumulate interested party feedback. The comment deadline for the exposed items is January 11, 2021.


Our next article will focus on a rather hot-button discussion item within the Working Group.  It deals with levelized commission accounting through the use of third-party funding agreements. It is one that certain regulators have observed variable accounting during regulatory examinations and want the matter addressed quickly to bring all reporting constituents under the intended reporting of SSAP No. 71 – Policy Acquisition Costs and Commissions.