Statutory Issue Paper No



Exposure DraftIssue Paper No. XX— Derivatives and HedgingHearing Date: 2018 Summer National Meeting or Interim Conference CallLocation: 2018 Summer National Meeting or Interim Conference CallDeadline for Written Notice of Intent to Speak:June 22, 2018Deadline for Receipt of Written Comments:June 22, 2018Notice of Public Hearing and Request for Written CommentsBasis for hearings. The Statutory Accounting Principles Working Group (SAPWG) will hold a public hearing to obtain information from and views of interested individuals and organizations about the standards proposed in this Exposure Draft. The SAPWG will conduct the hearing in accordance with the National Association of Insurance Commissioners (NAIC) policy statement on open meetings. An individual or organization desiring to speak must notify the NAIC in writing by June 22, 2018. Speakers will be notified as to the date, location, and other details of the hearings.Oral presentation requirements. The intended speaker must submit a position paper, a detailed outline of a proposed presentation or comment letter addressing the standards proposed in the Exposure Draft by June 22, 2018. Individuals or organizations whose submission is not received by that date will only be granted permission to present at the discretion of the SAPWG chair. All submissions should be addressed to the NAIC staff at the address listed below.Format of the hearings. Speakers will be allotted up to 10 minutes for their presentations to be followed by a period for answering questions from the SAPWG. Speakers should use their allotted time to provide information in addition to their already submitted written comments as those comments will have been read and analyzed by the SAPWG. Those submissions will be included in the public record and will be available at the hearings for inspection.Copies. Exposure Drafts can be obtained on the Internet at the NAIC Home Page (). The documents can be downloaded using Microsoft Word.Written comments. Participation at a public hearing is not a prerequisite to submitting written comments on this Exposure Draft. Written comments are given the same consideration as public hearing testimony.The Statutory Accounting Principles Statement of Concepts was adopted by the Accounting Practices & Procedures (EX4) Task Force on September 20, 1994, in order to provide a foundation for the evaluation of alternative accounting treatments. All issues considered by the SAPWG will be evaluated in conjunction with the objectives of statutory reporting and the concepts set forth in the Statutory Accounting Principles Statement of Concepts. Whenever possible, establish a relationship between your comments and the principles defining statutory accounting.The exposure period is not meant to measure support for, or opposition to, a particular accounting treatment but rather to accumulate an analysis of the issues from other perspectives and persuasive comments supporting them. Therefore, form letters and objections without valid support for their conclusions are not helpful in the deliberations of the working group. Comments should not simply register your agreement or disagreement without a detailed explanation, a description of the impact of the proposed guidelines, or possible alternative recommendations for accomplishing the regulatory objective.Any individual or organization may send written comments addressed to the Working Group to the attention of Julie Gann at jgann@, Robin Marcotte at rmarcotte@, Fatima Sediqzad at fsediqzad@ and Jake Stultz at jstultz@ no later than June 22, 2018. Electronic submission is preferred. Julie Gann is the NAIC Staff that is the project lead for this topic.National Association of Insurance Commissioners 1100 Walnut Street, Suite 1500, Kansas City, MO 64106-2197(816) 842-3600Statutory Issue Paper No. XXDerivatives and Hedging StatusInitial Draft – March 24, 2018Type of Issue: Common AreaSUMMARY OF ISSUECurrent statutory accounting guidance for derivatives is in SSAP No. 86—Derivatives. Although SSAP No. 86 indicates “adoption of the framework” of specific U.S. GAAP guidance, the accounting and reporting guidance for derivatives, particularly with regards to the four U.S. GAAP derivative cornerstones, is distinctly different between SSAP No. 86 and FAS 133/ASC 815. With the variations between U.S. GAAP and SAP, instruments may qualify for hedging under SAP, and not qualify as hedging instruments under U.S. GAAP, and “effective” hedges are accounted for differently between U.S. GAAP and SAP. NAIC staff has also received questions on the completion of Schedule DB, and the use of SSAP No. 86 Exhibit C, in completing Schedule DB. These questions have highlighted that potential inconsistencies may exist between the guidance in the body of the SSAP, the SSAP exhibit and the annual statement instructions.In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. In addition, the amendments incorporated certain targeted improvements to simplify the application of the hedge accounting guidance in current U.S. GAAP. The ASU did not make any modifications to the four U.S. GAAP cornerstones on the accounting for derivatives in ASC 815-10-10-1. This issue paper has been drafted to consider the FASB amendments within ASU 2017-12, as well as assess continuation (with documentation) of distinct differences between GAAP and SAP on the accounting for derivatives in SSAP No. 86—Derivatives. Staff Note – Due to the magnitude of revisions, NAIC staff has divided the discussion to mirror the sections noted by the FASB. (This seems a manageable way to review the edits and proposed revisions.) The initial presentation simply includes a summary of the ASU revisions and an initial staff assessment of the applicability for SAP. NAIC staff would request comments from regulators and interested parties on the initial assessments, and the extent to which revisions should be incorporated into SAP. Discussion – Amendments in ASU 2017-12: Topic 1: Risk Component Hedging / Hedges of Nonfinancial Assets / Benchmark Interest RatesThe revisions in ASU 2017-12 reflect the FASB conclusion that an entity should be permitted to designate the variability in cash flows attributable to changes in a contractually specified component in the contract as the hedged risk in the hedge of a nonfinancial asset. A contractually specified component is defined as an index or price explicitly referenced in an agreement to purchase or sell a nonfinancial asset other than an index or price calculated or measured solely by reference to an entity’s own operations. The FASB decided that by allowing contractually specified component hedging for nonfinancial assets, an entity can more accurately reflect the effects of its risk management on its financial reporting. Furthermore, the FASB believes that designating variability in cash flows attributable to changes in a contractually specified component as the hedged risk is objective and is relatively straightforward to apply. (BC 45-46)Additionally, in ASU 2017-12, in response to comments requesting a more flexible approach to hedging interest rate risk, the FASB decided to amend the guidance for hedging interest rate risk of financial instruments for both fair value and cash flow hedges. With the revisions, the FASB decided to redefine the term interest rate risk and eliminate the benchmark interest rate concept for variable-rate financial instruments. With the changes, the FASB incorporated the SIFMA rate in the list of eligible rates for fixed-income instruments, and noted that the FASB will add to the list of eligible benchmark rates as necessary. Current U.S. GAAP contains limitations on how an entity can designate the hedged risk in certain cash flow and fair value hedging relationships. To address those current limitations, the ASU amendments permit hedge accounting for risk components in hedging relationships involving nonfinancial risk and interest rate risk as follows: For a cash flow hedge of a forecasted purchase or sale of a nonfinancial asset, an entity could designate as the hedged risk the variability in cash flows attributed to changes in a contractually specified component stated in the contract. The amendments remove the requirement in current U.S. GAAP that only the overall variability in cash flows or variability related to foreign currency risk could be designated as the hedged risk in a cash flow hedge of a nonfinancial asset. (Related to SSAP No. 86, paragraph 25c)For a cash flow hedge of interest rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest rate. By eliminating the concept of benchmark interest rates in U.S. GAAP, the amendments remove the requirement to designate only the variability in cash flows as the hedged risk in a cash flow hedge of a variable-rate instrument indexed to a nonbenchmark interest rate. (As this is specific to cash flow hedges, related to SSAP No. 86, paragraph 24d.)For a fair value hedge of interest rate risk, the amendments add the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate as an eligible benchmark interest rate in the U.S. in addition to those already permitted under current GAAP. Under U.S. GAAP the U.S. Treasury Rate, the LIBOR Swap Rate, and the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) are permitted. This amendment allows an entity that issues or invests in fixed-rate tax-exempt financial instruments to designate as the hedged risk changes in fair value attributable to interest rate risk related to the SIFMA Municipal Swap Rate rather than overall changes in fair value. (Related to SSAP No. 86, paragraph 12.)Initial Staff Assessment: NAIC staff does not see a regulatory reason to be different from U.S. GAAP with regards to these ASU changes. Otherwise, transactions that qualify as effective hedges under U.S. GAAP would not qualify as effective hedges under SAP. Topic 2: Accounting for the Hedged Item in Fair Value Hedges of Interest Rate RiskThe revisions in ASU 2017-12 identify that the previously adopted GAAP guidance incorporated additional restrictions when using fair value hedges for interest rate risk then what existed for cash flow hedges. The FASB noted that the overall risk management objective is the same (converting cash flows), therefore the hedge accounting construct (fair value or cash flow hedge) should not affect whether hedge accounting could be applied. For these reasons, and to reduce complexity that has historically made the fair value hedging model more restrictive, the FASB made the following amendments: The amendments permit an entity to measure the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception, rather than on the full contractual coupon cash flows as required under prior U.S. GAAP. The amendments permit an entity to measure the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged. Current GAAP does not allow this methodology when calculating the change in the fair value of the hedged item attributable to interest rate risk. For prepayable financial instruments, the amendments permit an entity to consider only how changes in the benchmark interest rate affect a decision to settle a debt instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk. For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, the amendments permit an entity to designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method). Under this designation, prepayment risk is not incorporated into the measurement of the hedged item. Total Coupon / Benchmark Cash Flows – Current GAAP requires the use of the total contractual cash flows in determining the change in the fair value of a hedged item attributable to interest rate risk. Stakeholders have identified that assessing hedge effectiveness and measuring ineffectiveness using the total coupon cash flows misrepresents true hedge effectiveness by incorporating credit factors into the calculation. After considering these comments, the amendments permit entities to use benchmark rate coupon cash flows determined at hedge inception in calculating the change in the fair value of the hedged item attributable to interest rate risk. This provision is permitted regardless of whether the fixed coupon rate includes a positive or negative spread to the benchmark rate. Partial Term Fair Value Guidance – Although partial-term hedges are not prohibited under current GAAP, the current guidance acknowledges that it often would be difficult to obtain a derivative that will meet the highly effective offset requirement. This is because that the principal repayment of the debt occurs at a different time than the maturity date of the interest rate swap. The stakeholders indicated that the partial-term fair value hedging model under current GAAP does not align with an entity’s risk management activities. These comments noted that they view risk management as managing cash flows, however the mechanics of fair value hedging often prevent an entity from obtaining hedge accounting for swapping fixed cash flows to floating cash flows. These comments noted that these derivatives can be highly effective if effectiveness is assessed using the hypothetical derivative method. Under that method, the comparisons occur with a hypothetical derivative that is the perfect hedge of the cash flows designated as the hedged item. The FASB agreed with these comments and concluded that there should be equitable treatment for partial-term fair value and cash flow hedges. The FASB also noted that this treatment would result in convergence between GAAP and IFRS, as the international standards allow an entity to make a simplifying assumption for hedge accounting purposes that the hedged item has the same implicit maturity date as the hedging instrument, thus enabling the hedging relationship to achieve highly effective offset. The FASB also noted that this change addresses some of the concerns on prepayable instruments, particularly if the callable instrument has a partial-term hedge before the call date. In those situations, the prepayment risk would not need to be considered when assessing effectiveness. Hedges of Prepayable Financial Instruments – Current GAAP requires the effect of an embedded prepayment option to be considered in designating a hedge of interest rate risk. Industry practice has interpreted this requirement to mean that an entity must consider all factors that could lead an entity to settle the financial instrument before its scheduled maturity (e.g., changes in interest rates, credit spreads, or other factors), even if it has designated only interest rate risk as the risk being hedged. The comments to the FASB identified that estimating the fair value of the prepayment option to the precision required in the current reporting and regulatory environment is virtually impossible, and noted that a preference that an entity be required to consider only how changes in the benchmark interest rate affect the likelihood of settlement before scheduled maturity. It was also noted that allowing a prepayment option to be modeled considering only the changes in the benchmark interest rate more closely aligns the accounting for these hedges with the fair value of the hedged item attributable to interest rate risk. The FASB agreed with these comments. (New guidance in 815-20-25-6B)Hedging a Portfolio of Prepayable Assets Secured by a Portfolio of Prepayable Financial Instruments – The ASU amendments incorporate a new approach to allow the hedging of a portfolio of prepayable assets – specifically for loans and mortgage-backed securities. (Under the prior guidance, hedging portfolios of prepayable financial assets was identified as operationally burdensome, requiring frequent dedesignations and redesignations to comply with fair value hedge accounting requirements.) Under the new “last layer” approach, the hedged item can be designated as a stated amount remaining in a closed portfolio of prepayable assets. (Thus, risks arising from prepayments, defaults and other factors affecting the timing and amount of cash flows do not relate to the layer designated as the hedged item.) (This is the inverse of the hedged item in a cash flow hedge under a forecasted transaction in which the hedged item is the designated “first dollar amount.”) The FASB identified that this approach is only operable under other amendments in this ASU, and noted the following key elements for this approach.Entity must elect to hedge interest rate risk for a portion of the remaining term of the assets being hedged such that the assumed maturity date of the prepayable financial assets within the closed pool is identified from a hedge accounting perspective. (That is, designate the prepayable financial assets or beneficial interests being hedged by applying the partial-term guidance in the ASU.)All assets in the portfolio for hedge accounting purposes would be considered nonamortizing and nonprepayable with the same maturity and coupon, resulting in the similar asset test being performed on a qualitative basis. At inception and for ongoing effectiveness testing, entity should complete and document an analysis to support the expectation that the hedged item (last layer) is anticipated to be outstanding as of the hedge item’s assumed maturity date. This analysis would incorporate current expectations of prepayments, defaults and other events affecting the timing and amount of cash flows associated with the closed portfolio of prepayable financial assets. As long as the hedged item (designated last layer) is anticipated to be outstanding as of the assumed maturity date, the hedging relationship can continue and measurement of the hedged item need not incorporate the risks arising from prepayments, defaults and other factors affecting the timing and amount of cash flows. If an entity determines that the outstanding amount of the closed portfolio as of the reporting date is less than the hedged item (designated last layer), the hedging relationship must be discontinued immediately. Because the forecasting was unsuccessful, the entity would not be afforded any flexibility of partial designations. The Board identified that estimating the balance expected to be remaining at the hedged item’s assumed maturity date resembles a cash flow hedging concept. However, the FASB concluded that other aspects of the cash flow hedging model need not be incorporated in to the “last layer” method. (This means that the probable threshold from the cash flow model, nor a tainting threshold would be incorporated into the method.)In addressing questions on adjustments to the carrying value of assets linked to the hedging relationship designated as “last layer,” the FASB concluded that basis adjustments need not be allocated to outstanding last layer method hedging relationships for subsequent measurement purposes for the following reasons: Basis adjustments for this hedging relationship relates directly to the hedged item (designated last layer), not the assets that make up the closed portfolio. If an asset was sold from the closed portfolio and the remaining balance of the portfolio exceeds the designated last layer, a portion of the remaining basis adjustments does not need to be allocated to the asset that was sold. If basis adjustments are allocated to individual assets during the life of a hedging relationship, it may result in financial reporting outcomes that are inconsistent with the risk management activities that are undertaken. For example, if an entity elects to allocate basis adjustments for this hedging relationship to individual assets, and those assets were sold or prepaid, it may result in noneconomic gains or losses on extinguishment because of hedge accounting adjustments that would have naturally reversed over the life of the hedging relationship. The Board identified that the use of the term “outstanding” to describe the balance of the hedged item was intended to encompass currently performing loans held by the entity (not delinquent, in default, or with cash flows affected otherwise in an adverse manner). In response to questions, the FASB indicated that the approach could be utilized for a mortgage-backed security, any beneficial interest, or a portfolio of beneficial interests collateralized by prepayablee financial instruments. The FASB concluded that applying the approach to those asset-backed securities is reasonable because the cash flows paid or received on a beneficial interest are generated from a portfolio of financial instruments. The Board indicated that since this last layer method involves prepayable assets, the short-cut method is prohibited from being applied. Initial Staff Assessment: NAIC staff believes further analysis is necessary before incorporating these concepts into SSAP No. 86. SAP guidance for fair value hedges is inherently different from U.S. GAAP, and the existing differences allow for fair value hedges under SAP that would not be permitted under U.S. GAAP. (Under GAAP, fair value hedges require an exposure to changes in fair value that could affect earnings. An entity is only permitted under U.S. GAAP to designate a debt security reported at amortized cost with a hedge of credit or foreign exchange risk, but not overall changes in fair value.) If the ASU revisions were incorporated into SAP, NAIC staff expects the provisions would create confusion and exacerbate the reporting issues when a hedged item is reported at amortized cost. Although revisions may be ultimately considered, NAIC staff believes discussion on the existing guidance for fair value hedges should concurrently occur. Topic 3: Recognition and Presentation of the Effects of Hedging InstrumentsThe revisions in ASU 2017-12 intend to better portray the economic results of an entity’s risk management activities in its financial statements. As such, the ASU amendments align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements to increase the understandability of the results of an entity’s intended hedging strategies. With these amendments, entities are required to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. (These revisions remove the U.S. GAAP guidance to bifurcate the ineffective and effective portions of a hedge with separate recognition of those components.) The amendments are noted as follows: Fair Value Hedges – The entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is presented in the same income statement line that is used to present the earnings effect of the hedged item. Cash Flow and Net Investment Hedges – The entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness is recorded in other comprehensive income (for cash flow hedges) or in the current translation adjustment section of other comprehensive income (for net investment hedges). Those amounts are reclassified to earnings in the same income statement line item that is used to present the earnings effect of the hedged item when the hedged item affects earnings. With the ASU revisions, the FASB clarified that this income statement presentation would result in some instances with all changes in fair value of the hedging instrument to be included in a single income statement line. However, depending on the hedging relationship, it could result with the changes being included in more than one income statement line: If a hedging relationship involves only interest rate risk in an interest-earning asset or interest-bearing liability (carried at amortized cost), the earnings effect before applying hedge accounting is typically presented in an interest income or interest expense line item. As such, all changes in fair value of the hedging instrument would be included in the interest income or interest expense line item. If a hedging relationship involves hedging both the interest rate risk and foreign currency risk of an interest-earning asset or interest-bearing liability (carried at amortized cost) denominated in a currency other than the entity’s functional currency, the earnings effect of the hedge item before applying hedge accounting typically is presented in both an interest income or interest expense line and another line item used to present the spot remeasurement of its foreign-currency denominated assets and liabilities. Since the earnings effect of the hedged item was in two income statement line items, the FASB concluded that it would also be appropriate to present the changes in fair value of the hedging instrument in those same two income statement line items. The portion of the hedging instrument associated with converting the interest cash flows from fixed-rate to floating should be presented in the interest income or interest expense, with the portion attributed to the foreign currency hedge would be in that income statement line. With the ASU revisions, the FASB decided that if an entity enters into a hedging instrument, all effects of that hedging instrument (the effective and ineffective portions) are to be presented together with the earnings effect of the hedged item. The FASB opposed allowing companies an election to continue reporting the effective and ineffective portions separately. This is a change from current GAAP where only the effective portion of the change in the fair value of the hedge instrument is accorded hedge accounting treatment. For cash flow and net investment hedges, hedge accounting permitted the change in fair value of the hedging instrument to be recognized in other comprehensive income and reclassified to earnings when the hedged item also affected earnings. Under GAAP, for cash flow hedges, this could impact when the ineffective portions affect earnings, as now those portions will also be deferred in OCI until the hedged item has an earnings impact. (Under GAAP, there is no change in the timing of recognition for ineffective portions of fair value hedges.) For hedging instruments with multiple cash flows or periodic cash settlements (such as swaps or caps), the FASB recognized that the initial fair value (if not zero) or some portion of the initial value of the hedging instrument would remain in accumulated other comprehensive income when the hedging instrument matures. For these situations, the Board agreed that amounts related to the initial fair value shall be amortized to earnings (out of OCI) on a systematic and rational basis. Initial Staff Assessment: NAIC staff agrees with the intent of the FASB revisions, and the “matching” of the income statement reporting for hedged items and hedging instruments. Similar to prior comments, NAIC staff believes a review of the accounting and reporting for hedges under SAP may be necessary to ensure appropriate guidance. Lastly, existing guidance in SSAP No. 86 identifies that entities should not bifurcate effectiveness. Under SAP, a derivative instrument is either effective or ineffective. Topic 4: Amounts Excluded from Hedge EffectivenessUnder current GAAP entities are permitted to exclude option time value (or portions thereof) and forward points from the assessment of hedge effectiveness. The amendments in the ASU expanded this guidance to exclude a portion of the change in fair value of a currency swap attributable to a cross-currency basis spread from the assessment of hedge effectiveness. (The FASB noted that when excluding cross-currency spreads from the assessment of effectiveness, there is no need to manually amortize changes in the value of the spread to earnings as the effect of the swap discounting to zero reverses to zero in AOCI as the swap matures.) With regards to excluded components, the FASB agreed that the mark-to-market recognition approach required under GAAP did not reflect the economics of the excluded component, and a recognition approach that better reflects the economic cost of the excluded component would be most appropriate. The ASU reflects the following changes for excluded components for all types of hedges: Initial value of an excluded component is recognized in earnings using a systematic and rational method over the life of the hedging instrument, and any difference between the change in fair value of the excluded components and amounts recognized in earnings under the systematic and rational method are recognized in other comprehensive income. (Under this amortization approach, the excluded component is viewed as a fixed cost that should be expensed over time.) Entity could elect to recognize changes in fair value of an excluded component currently in earnings. If elected, this approach is required to be applied consistently to all similar hedging relationships and disclosed as an accounting policy election. Under each approach, amounts related to excluded components that are recorded in earnings are presented in the same income statement line items as the earnings effect of the hedged item. In the event of a de-designation of a hedging relationship, changes in fair value for an excluded component in AOCI should be recognized in earnings consistent with how amounts are recognized in earnings for discontinued fair value, cash value and net investment hedges. Initial Staff Assessment: NAIC staff agrees with the concept of excluding components from the assessment of hedge effectiveness and in establishing appropriate accounting and reporting guidance for those excluded components. Topic 5: Improvements in Assessing Hedge EffectivenessThe Basis of Conclusions in the ASU document several elements the FASB considered in revising the guidance for effectiveness, including a proposal to revise the “highly effective” assessment to a “reasonably effective” assessment (similar to the IFRS). Several of these proposals were ultimately rejected by the FASB, with the following amendments incorporated as targeted improvements to ease the application of assessing hedge effectiveness: In instances in which quantitative testing is required, an entity may perform subsequent assessments of hedge effectiveness qualitatively. An entity that makes this election is required to verify and document on a quarterly basis that the facts and circumstances related to the hedging relationship have not changed such that the entity can assert qualitatively that the hedging relationship was and continues to be highly effective. An entity may elect to perform qualitative assessments on a hedge-by-hedge basis. For purposes of assessing whether the qualifying criteria for the critical terms match method are met for a group of forecasted transactions, an entity may assume that the hedging derivative matures at the same time as the forecasted transactions if both the derivative maturity and the forecasted transactions occur within the same 31-day period or fiscal month. Entities will be able to perform the initial prospective quantitative assessment of hedge effectiveness at any time after hedge designation, but no later than the first quarterly effectiveness testing date, using data applicable as of the date of hedge inception. To provide additional relief on the timing of hedge documentation, private companies that are not financial institutions and not-for-profit entities may select the method of assessing effectiveness, and perform the initial quantitative effectiveness assessment and all quarterly hedge effectiveness assessments before the date on which the next interim (if applicable) or annual financial statements are available to be issued. (This incremental relief does not impact the simplified hedge accounting approach for private companies.) If an entity that applies the short-cut method determines that use of that method was not, or no longer, appropriate, the entity may apply a long-haul method for assessing hedge effectiveness as long as the hedge is highly effective and the entity documents at inception which long-haul methodology it will use. Initial Staff Assessment: NAIC staff agrees with considering revisions to the documentation of hedge effectiveness, as NAIC staff does not believe the intent was to require more documentation under SAP than what is required under US GAAP. NAIC staff also notes that the concept of the short-cut method is not currently documented in SSAP, but could be considered. (Under this method, perfect effectiveness is assumed when all explicitly noted conditions are met.) NAIC staff did not identify in the historical issue paper if the short-cut method was previously considered. Topic 6: Disclosure RevisionsThe amendments in the ASU modify the disclosures required under U.S. GAAP, intending to provide enhanced disclosures on hedging activities and the effect of those activities on the financial statements.Fair Value Hedge – Disclosure requires entities to disclose the carrying amount of the hedged asset or liabilities. This disclosure requires entities to disclose the amortized cost basis of closed portfolios linked to last-of-layer method hedging relationships or the hedged item for the non-last-of-layer method hedging relationships. Tabular Disclosure – Current GAAP requires a tabular disclosure of the location and amount of gains and losses reported in the income statement (or OCI as applicable) by type of contract. The amendments in the ASU revises the tabular disclosure as follows: Requirement to disclose ineffective portion of gains and losses is eliminated. For fair value hedge, the amount of periodic gains and losses on hedged items is included in the tabular disclosure. For cash flow hedges, the amount of gains and losses on hedging instruments shown by income and expense line item related to amounts reclassified from AOCI to earnings for forecasted transactions that are probable of not occurring is included in the tabular disclosure. For fair value and cash flow hedges, the total amount of each income and expense line item in the income statement for which hedge accounting adjustments have been recorded. For fair value and cash flow hedges, amount of gains and losses on hedging instruments and related hedged items shown by income and expense line item so that those amounts can be compared with the total amounts of income and expense line items presented in the income statement. For fair value and cash flow hedges, for amounts excluded from the assessment of effectiveness, separate disclosure of amounts recognized in earnings under an amortization approach or a mark-to-market through earnings approach. Initial Staff Assessment: NAIC staff agrees with considering revisions to the disclosure and reporting schedule (Schedule DB) for derivative transactions. Although SAP modifications from GAAP may be necessary, NAIC staff agrees with the concept to incorporate disclosures that clearly depict the effect of hedging transactions on specific financial statement lines. Topic 7 - Effective Date and TransitionThe amendments in the ASU are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018. (This is essentially a Jan. 1, 2019 effective date.) For private companies, the effective date is essentially Jan. 1, 2020 for annual reporting, and Jan. 1, 2021 for interim periods. Reporting entities are permitted to early adopt the amendments in any interim period after issuance because the amendments are intended to be simplifications of the hedge accounting model. (If adopting in an interim period, a cumulative-effect adjustment is required to the beginning of the year.) General transition concepts are as follows: Amendments related to the elimination of the separate measurement of ineffectiveness shall reflect a modified retrospective method to record the cumulative effect of applying the change to the opening balance of retained earnings as of the application date. Entity shall apply this transition method to existing hedging relationships as of the date of adoption. This includes hedging relationships in which the hedging instrument has not expired or been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship. (The Board noted that the modified retrospective method is appropriate for cost-benefit reasons, noting that the cumulative-effect adjustment is generally insignificant to the entity’s financial results.) Various transition elections are provided in the ASU related to specific amendments. Initial Staff Assessment: NAIC staff requests comments on transition options, noting that the transition impact will be determined based on actual revisions incorporated into SAP. FILENAME \p \* MERGEFORMAT G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2018\Spring\NM Exposures\17-33 - IP Derivatives.docx ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download