ASU 2014-17 – Business Combinations, Pushdown Accounting – SSAP 68 –
SAPWG Reference 2019-12 – Effective Immediately
This decision would reject the use of pushdown accounting under the premise that although statutory accounting attempts to utilize the background established by U.S. GAAP, statutory accounting focuses on the balance sheet and conservatism, and places secondary emphasis on the income statement.
SAPWG determined modifications would be made to SSAP 68, paragraph 7, noting that goodwill deriving from the acquisition of a subsidiary, controlled or affiliated (SCA) entity by an insurance reporting entity reported on the SCA’s financial statements (resulting from the application of pushdown) would continue to be subject to the 10% admittance limit based on the acquiring entity’s capital and surplus.
SAPWG further chose for the benefit of interested parties to re-expose and consider comments and examples received on pushdown accounting.
Other Derivatives – SSAP 86 – SAPWG Reference 2019-18 – Effective Immediately
SSAP No. 86 direction is limited to the derivatives captured within specific transactions (hedging, income generation, or replication). The reporting schedule for derivatives (Schedule DB) includes an “other” derivative reporting category. This agenda item explains the accounting (measurement) value for this particular category. However, “other” derivatives do not qualify as admitted assets under the SSAP. Derivatives classified as “other” are only admitted per state prescribed investment practices that permit admittance. Those practices are required to be explained in Note 1. Derivatives reported in the “hedging-other” are derivatives subject to the “hedging” guidance in SSAP No. 86 and are not intended to be captured by this agenda item. This agenda item is purely for the derivatives reported as “other” derivatives.
During the fall meeting, SAPWG adopted as final revisions to SSAP 86, indicating that derivatives not used in hedging, income generation, or replication are considered “other derivatives.” They are to be measured at fair value with those changes reflected and recorded as unrealized gains and losses. They are not to be characterized as admitted assets.
Supplemental Investment Risk Interrogatories (“SIRI”) – Equity Interests –
SAPWG Reference 2019-19 – Effective Immediately
This item surfaced to provide direction to filers on what is to be captured in Line 13: 10 Largest Equity Interests of the Supplemental Investment Risks Interrogatories (SIRI). What is the purpose of the SIRI? Answer = “to assist regulators in reviewing compliance with state investment limitations and analyzing the risks inherent in an entity’s investment portfolio.” The confusion appears to have crept into the process, however, and questions have been posed in certain areas indicating that consistent application is potentially lacking and the intended accumulations are not being achieved in the reporting process.
SAPWG’s final decision called for amplification of the SIRI instructions in the blanks, stating a look-through methodology should only be utilized for non-diversified funds. Investments reflected in a diversified fund are to be excluded from an accumulation requirement to other equity investments. SAPWG also adopted guidance to include SVO-Identified Bond ETFs and SVO-Identified Investments with characteristics of fixed-income investments as specific exclusions from the SIRI listing.
Wash Sale Disclosures – SSAP 103R – Transfer and Servicing of Financial Assets and Extinguishment of Liabilities – SAPWG Reference 2019-22
The industry has informed the NAIC staff that the resource drain and time-intensity involved in the tracking of wash sales prove very little use when compared to the initial purpose of tracking these transactions and their associated risks. Industry constituents provided an example of investments sold and repurchased during the same reporting period. For example, take a security sold on April 1 and repurchased on April 20. In this instance, the security, which is then carried at the reporting date, does not convey any greater risk than if it had been owned throughout that period and at the period-end date. The discernable risk with this type of activity occurs when the security is sold prior to the end of a reporting period and then repurchased shortly after that date (i.e., crossing reporting periods).
On December 7, SAPWG adopted final revisions to SSAP 103R clearly explaining that investments meeting the definition of a wash sale, and which also cross reporting periods, are the only transactions subject to the wash sale disclosure.
Going Concern – SSAP 97 – Investments in Subsidiary, Controlled or Affiliated Entities –
SAPWG Reference 2019-23 – Effective Immediately
As a result of an increasing trend in 2018 audits indicating a higher frequency of “going concern” opinions in subsidiary, controlled, and affiliated companies (SCAs) Sub 2 filings, the NAIC SAPWG group has raised an eyebrow. Going concern is the concept that a company will be viable into the foreseeable future unless there is an indication opposing such an assumption. A firm performing an audit of financial statements has the responsibility to assess an entity’s capacity to endure as a going concern. Should “substantial doubt” arise regarding this going concern ability, a going concern qualification is required to be included in the auditor’s opinion of the entity’s financial statements.
What has garnered SAPWG attention are situations over the last year whereby several audit opinions have been observed that refrained from detailing the going concern in the opinion. Yet, the notes in the audited report reflected the existence of a potential going concern.
Under the long-standing statutory concept of conservatism, SAPWG has adopted revisions to clarify that “if an unalleviated going concern is noted in the audited financial statements or audit opinion, the SCA shall be non-admitted.”
Rejected ASU promulgations – effective immediately:
- SAPWG Reference 2019-28 – ASU 2019-05 – Targeted Transition Relief – rejected as not-applicable to statutory accounting. This ASU provided certain modifications and simplifications to user applications under ASU 2016-13 – Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. SAPWG cited SSAP No. 100R – Fair Value as the primary guiding principle behind statutory fair value reporting, along with supporting investment SSAPs that may also apply. As such, the ASU was rejected in full.
- SAPWG Reference 2019-29 – ASU 2019-06 – Extended the Private Company Accounting Alternative on Goodwill and Certain Identifiable Intangible Assets to Not-for-Profit Entities – rejected as not applicable to statutory accounting. SSAP No. 68 – Business Combinations and Goodwill and SSAP No. 97 – Investments in Subsidiary, Controlled or Affiliated Entities revised to indicate rejection for statutory accounting purposes.
- SAPWG Reference 2019-30 – ASU 2019-03 – Updating the Definition of Collections – rejected as not applicable to statutory accounting. FASB issued this promulgation to revise the definition of works of art and historical treasures referred to as “collections” in the FASB Master Glossary. It has no application to statutory accounting, and SAPWG has moved it to Appendix D – Nonapplicable GAAP Pronouncements.
- SAPWG Reference 2019-31 – ASU 2018-08 – Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made – rejected as not applicable to statutory accounting. This ASU primarily relates to not-for-profit entities. It has no application to statutory accounting, and SAPWG has moved it to Appendix D – Nonapplicable GAAP Pronouncements.