Focus on Accounting

1. Focus on Accounting Cayman Islands Society of Professional Accountants Insurance Subcommittee of the Public Practice Committee

2. Focus on Accounting Contents 1) IASB & FASB Insurance contracts project update 2) ASU 2013-01: Disclosures about offsetting assets & liabilities 3) ASU 2013-02: Reporting amounts classified out of other comprehensive income 4) ASU 2013-03: Fair value disclosures – clarification 5) ASU 2013-07: Liquidation Basis of Accounting 6) Definition of a public entity 7) Going concern proposal 8) Investment disclosure reminders

3. 1 IASB & FASB Insurance contracts project update

4. IASB & FASB Insurance contract project Objectives 1 Improve, simplify and converge the financial reporting requirements for insurance contracts 2 Eliminate numerous pieces of current US accounting literature 3 Provide a comprehensive insurance standard for IFRS reporting 4 Provide investors with more decision useful information 

5. Insurance contracts project milestones Sub title Text • Effective date of the final IFRS standard will likely be approximately 3 years after the standard is issued. • The IASB staff currently estimate that the issuance date will be late 2014 to early 2015. The IASB has stated that it expects the earliest possible effective date to be for annual reporting periods beginning on or after January 1, 2017. • The FASB decided not to include a minimum time period between the issuance of the standard & the effective date in its ED, but rather to ask a question about the key drivers affecting the timing of implementation.

6. Background and overview Major changes since the 2010 proposals • IASB: • re-exposure includes full text of proposed standard • limited questions to avoid re-opening of issues • does not intend to revisit other aspects of proposed standard after re-exposure • intends to undertake fieldwork during re-exposure Text • FASB: • has a full exposure draft • intends to undertake fieldwork during the exposure period The comment period for the exposure drafts ended October 25, 2013. In addition, the ED includes questions on cost/benefit aspects, and the clarity of drafting of the proposals.

7. Comparison between the IASB & FASB models

8. Proposed measurement models Building block 1 – Cash flows Estimates of cash flows would include all cash inflows and outflows related directly to the fulfilment of the portfolio of contracts the contract belongs to and would: • be explicit (i.e. separate from estimates of discount rates that adjust for the time value of money & the risk adjustment) • reflect the perspective of the entity (provided that estimates of any relevant market variables do not contradict observable market prices for those variables) • incorporate, in an unbiased way, all available information that relates to the cash flows of the contracts • be current, i.e. reflect all available information at the measurement date • include only cash flows arising within the boundaries of existing contracts Estimates would be updated each reporting period & measured at a portfolio level of aggregation for insurance contracts. Insurance liability under the building – block approach and the onerous contract liability under premium allocation approach reflects estimates at the reporting date.

9. Proposed measurement models Building block 1 – Acquisition costs Included in fulfilment cash flows: All directly attributable acquisition costs that can be allocated on a rational and consistent basis to the individual insurance portfolios. Includes also costs that cannot be attributed directly to individual insurance contracts in the portfolio. Acquisition costs incurred before a contract’s coverage period begins would be recognised as part of the measurement of the portfolio of insurance contracts. • FASB only - limited to those costs related to successful acquisition efforts • IASB only - no distinction between successful and unsuccessful efforts (all direct costs included) FASB lines up with current U.S. GAAP other than eliminating direct response advertising and the transition expedient in ASU 2010-26

10. Proposed measurement models Building block 2 – Time value of money Example bottom-up and top-down approach Financial instrument yield of 5.25% (based on actual assets held or a reference portfolio) • Either a top-down or a bottom-up approach may be used to determine an appropriate discount rate. • In theory, both approaches should result in the same discount rate; however, in practice, differences are expected. Top-down approach: 3.75% Bottom-up approach: 3.50% • No specific method prescribed. • Regardless of the approach used, the discount rate should be consistent with the characteristics of the insurance contract liability, e.g. timing, currency and liquidity.

11. Proposed measurement models Building block 3 – Risk adjustment (IASB only) • Risk Adjustment: “The compensation the insurer requires for bearing the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract” • If there are techniques that could represent faithfully the risk inherent in the insurance obligations, then the inclusion of an explicit risk adjustment would provide relevant information to users. Under the IASB’s approach, the measurement of an insurance contract should contain an explicit risk adjustment. • IASB not prescribing a unit of account for measurement of the risk adjustment. • IASB not limiting the range of available techniques and related inputs to the risk adjustment. • However, if a technique other than confidence level is used, that technique and the equivalent confidence level % would need to be disclosed. • Remeasured each reporting period and changes are recognised in profit or loss. • Replicating asset approach based on the fair value of the replicating asset may be appropriate.

12. Proposed measurement models Building block 4 – Contractual service margin (IASB only) Contractual service margin (IASB) Single margin (FASB) • Arises when the present value of the fulfilment cash flows * is less than zero (i.e. remove day-one gains) • If the present value of fulfilment cash flows is positive, recognise a loss in profit or loss at inception • Represents the unearned profit recognised as service is provided • Prospectively adjusted for changes in estimates of cash flows relating to future coverage or other future services; cannot become negative in subsequent measurement (unlocking) • Systematic release over coverage period based on the pattern of transfer of services provided • Classified as part of the insurance liability • Interest accretion using discount rate at inception • The single margin would not be re-measured subsequently (no unlocking) • Recognises profit as the entity satisfies its performance obligation to the policyholder - i.e. released from exposure to risk as evidenced by a reduction in the variability of cash outflows (usually longer than coverage period) • Separate presentation in statement of financial position • Interest accretion using discount rate at inception *defined as the expected present value of the future cash outflows, including pre-coverage cash-flows, less cash inflows plus risk adjustment

13. Proposed measurement models Liability for remaining coverage (measured by reference to UEP) The premium allocation approach Discounted liability for incurred claims Insurance liability • Simplified measurement approach for some short-duration contracts and similar approach to current practices for non-life contracts. • Consistent with revenue recognition proposals. • Liability for incurred claims according to BBA • Applies when: • Reasonable approximation of the building block model; or • Coverage period 12 months or less • Reasonable approximation when entity expects no significant variability in cash flows • IASB: permitted if criteria met. • FASB: required when criteria met = + DAC Onerous contract liability

14. Proposed measurement models The premium allocation approach • Initial measurement of the liability for remaining coverage Liability for remaining coverage Initial premium Directly attributable acquisition costs Onerous contract liability = - + • Discounting required if there is a significant financing component using discount rate at inception • Directly attributable acquisition costs can be expensed if coverage period is less than 1 year • Released on a systematic basis representing the transfer of services • Onerous contract test when facts and circumstances indicate it might be onerous • Subsequent measurement of the liability for remaining coverage Previous carrying amount Interest accretion (at initial rate) Premium received in period Revenue recognised for coverage Change in onerous contract liability - - + +

15. Proposed measurement models The premium allocation approach • Liability for claims incurred under the PAA is measured at the fulfilment cash flows Fulfilment cash flows • When a liability for incurred claims is discounted - use the discount rate at the inception of the contract to determine the amount of the claims and interest expense in profit and loss. • Discounting not required if cash flows are expected to be paid or received in one year less 1 Unbiased probability-weighted current estimates of future cash flows 2 Discounted at current rates to reflect the time value of money 3 Risk adjustment (IASB only)

16. Reinsurance Reinsurance assumed Evaluate the applicable approach in same manner as a direct contract IASB - Permits FASB - Requires • Eligibility Principle *Contracts eligible if the PAA would produce measurements that are a reasonable approximation of building-block approach. • Eligibility Criteria * • Apply the BBA rather than the PAA if at contract inception: • it is likely that there will be significant variability in the expected value of net cash flows required to fulfil a contract before a claim is incurred. * A contract would qualify automatically under both approaches if coverage period is one year of less

17. Presentation Presentation in statement of income and OCI • Insurance contract revenue is allocated to periods in proportion to the value of coverage (and other services) by reference to the estimated pattern of expected claims and expenses. • Insurance contract revenue exclude the amounts to be paid to policyholders regardless of whether an insured event occurs (‘the investment component’)

18. 2 ASU 2013-01: Disclosures about offsetting assets & liabilities

19. Disclosures about offsetting assets & liabilities US GAAP: ASU 2011-11 - Disclosures about Offsetting Assets and Liabilities • Started as a FASB/IASB joint project. • Boards were unable to agree on a converged model for offsetting financial instruments on the balance sheet. • FASB and IASB issued new guidance to: • –Improve their respective disclosure requirements, and • –Allow for better international balance sheet comparability. • New disclosures enable users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. • IASB amended IAS 32 and IFRS 7 – IFRS 7 offsetting disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013.

20. Disclosures about offsetting assets & liabilities US GAAP: ASU 2013-01: Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities • The FASB clarified the scope of the balance sheet offsetting disclosures through the issuance of the ASU 2013-01. The ASU limits the scope of the disclosures to: Recognized derivative instruments accounted for in accordance with ASC 815, Derivatives and Hedging, including bifurcated embedded derivatives Repurchase agreements and reverse repurchase agreements Securities borrowing and securities lending transactions That are either: –Offset in the statement of financial position, OR –Subject to an enforceable master netting arrangement or similar agreement ASU 2013-01 was issued in January 2013 with the effective date consistent with ASU 2011-11 (must apply retrospectively for annual periods beginning on or after January 1, 2013).

21. Disclosures about offsetting assets & liabilities IFRS: Amendments to IAS 32 and IFRS 7 – Offsetting financial assets and financial liabilities • IASB issued amendments to IAS 32 and IFRS 7 in December 2011 • Same netting requirements as US GAAP, however, scope broader. • IASB Scope applies to: • - Financial instruments netted under IAS 32 requirements including due to and from balances / receivables and payables (broader than US), and • Financial instruments subject to enforceable master netting arrangement or similar agreement irrespective of whether they are set off under IAS 32 (e.g. derivatives subject to master netting agreements, repos and reverse repos) • The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Entities will provide the disclosures retrospectively for all comparative periods.

22. Disclosures about offsetting assets & liabilities Disclosures • Quantitative information in a tabular format, separately for assets and liabilities. • The information required includes: • a) The gross amounts of those recognized assets and those recognized liabilities • b) The amounts offset in accordance with the guidance in ASC 210-20-45 and ASC 815-10-45 (and IAS 32) to determine the net amounts presented in the statement of financial position • c) The net amounts presented in the statement of financial position • d) The amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (b) • 1. The amounts related to recognized financial instruments and other derivative instruments that either: • i) Management makes an accounting policy election not to offset • ii) Do not meet some or all of the guidance in either ASC 210-20-45 or ASC 815-10-45 (or IAS 32) • 2. The amounts related to financial collateral (including cash collateral). • e) The net amount after deducting the amounts in (d) from the amounts in (c)

23. Disclosures about offsetting assets & liabilities Disclosures • The standard permits flexibility with respect to how certain items are disclosed. For example, companies can choose to disclose items (c) through (e) above either by type of financial instrument or by counterparty. Generally, it is expected that disclosures will be provided in a tabular format. The standard also contains several examples intended to illustrate its application. The examples in the guidance provide the following column headings that can be used in the tabular disclosure.

24. 3 ASU 2013-02: Reporting amounts classified out of other comprehensive income

25. ASU 2013-02 Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income • Expands disclosures for items reclassified out of accumulated other comprehensive income (AOCI). • Requires entities to disclose: • –For items reclassified out of AOCI and into net income in their entirety, the effect of the reclassification on each affected net income line item; and • –For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required US GAAP disclosures. • For public companies, effective prospectively for reporting periods beginning after December 15, 2012. • Under IFRS, entities report fewer amounts in other comprehensive income, and they are not required to subsequently reclassify all amounts of accumulated other comprehensive income to net income (profit or loss). Under IAS 1, entities must present reclassifications by component of OCI, either in the statement(s) containing profit or loss and other comprehensive income or in the notes to the financial statements. The disclosure requirements under IFRS, however, do not include the specific presentation requirements in this Update.

26. 4 ASU 2013-03: Fair value disclosures – clarification

27. ASU 2013-03 Clarifying Scope of ASU 2011-04 Fair Value Disclosures • Update clarified that exemption available under ASU 2011-04 does not apply to non-public entities that have total assets of $100 million or more (or that have one or more derivative instruments) • ASU 2013-03 is effectively immediately. • This means that any non-public entity having total assets of >$100m or have derivatives are required to disclose: • - Fair value hierarchy leveling disclosure for items that are not measured at FV in the BS but for which FV has to be disclosed (e.g.: HTM investments) • - Required to disclose transfers between Level 1 and 2 • - Level 3 qualitative sensitivities

28. 5 ASU 2013-07: Liquidation Basis of Accounting

29. ASU 2013-07 Liquidation basis of accounting • Requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is “imminent” unless the liquidation follows a plan for liquidation specified in the entity’s governing documents at inception. • “Imminent”: when there is a remote likelihood that the entity will return from liquidation and either of the following occurs: • –A liquidation plan has been approved by those with the authority to do so and the likelihood that execution of the plan will be blocked by other parties is remote; or • –A liquidation plan is imposed by other forces (e.g. involuntary bankruptcy). • Effective prospectively for annual reporting periods (and interim periods therein) beginning after December 15, 2013.

30. ASU 2013-07 Liquidation basis of accounting – recognition & measurement Assets • • Measure and present assets at estimated amount of cash proceeds /other consideration expected to be collected in settling/disposing of those assets. • •Include assets previously not recognized but are expected to be sold in liquidation/used in settling liabilities. • •Accrue estimated costs to dispose of recognized assets; present accruals in the aggregate, separately from the related assets. • •Do not apply discounting in measuring accruals for disposal costs. Liabilities • •Recognize and measure liabilities in accordance with US GAAP • •Adjust liabilities to reflect changes in assumptions resulting from decision to liquidate (e.g. timing of payments). • •Do not anticipate legal release as the primary obligor under those liabilities.

31. ASU 2013-07 Liquidation basis of accounting – recognition & subsequent measurement Other costs and income • • Accrue amounts expected to be incurred or earned (e.g. payroll expense/income from pre-existing orders) through the end of liquidation if and when a reasonable basis for estimation exists. • •Do not apply discounting provisions in measuring expected income and expense. At each reporting date • •Remeasure assets, liabilities and accruals for disposal or other costs or income to reflect the actual or estimated change in value since the previous reporting date.

32. ASU 2013-07 Liquidation basis of accounting - disclosures • At a minimum, an entity shall disclose all of the following: • a) That the FS are prepared using the liquidation basis of accounting, including facts and circumstances surrounding the adoption of liquidation basis of accounting and the entity’s determination that liquidation is imminent. • b) A description of the entity’s plan for liquidation, including a description of each of the following: • 1. The manner by which it expects to dispose of its assets and other items it expects to sell that it had not previously recognized as assets (for example, trademarks) • 2. The manner by which it expects to settle its liabilities • 3. The expected date by which the entity expects to complete its liquidation. • c) The methods and significant assumptions used to measure assets and liabilities, including any subsequent changes to those methods and assumptions. • d) The type and amount of costs and income accrued in the statement of net assets in liquidation and the period over which those costs are expected to be paid or income earned.

33. 6 Definition of a public entity

34. Public entity definition • FASB issued an Exposure Draft in August 2013 of a proposal that would amend the FASB ASC to include the definition of a public business entity that would apply prospectively to new accounting and reporting standards. • Any one of the following criteria would be considered a public business entity: • Entity is required by the SEC to file or furnish FS (including other entities whose FS or financial information are required to be or are included in a filing). • Entity is required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act, to file or furnish FS with a regulatory agency. • Entity is required to file or furnish FS with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities. • Entity has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market. • Entity’s securities are unrestricted, and it is required to provide U.S. GAAP FS to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement. • A consolidated subsidiary of a public company would not be considered a public business entity for purposes of its standalone FS other than those included in an SEC filing by its parent /by other registrants. Some of the existing definitions of a public entity in the ASC consider a consolidated subsidiary of a public company to be public e.g. ASC 820 on FV (ASU 2011-04).

35. 7 Going concern proposal

36. Going concern Proposal - FASB • FASB received input indicating that the lack of guidance in U.S. GAAP and the varying interpretations of when and how going concern uncertainties should be disclosed under the auditing standards result in diversity in the timing, nature, and extent of existing footnote disclosures. • The proposal is intended to provide preparers with guidance in U.S. GAAP on management’s responsibilities for evaluating and disclosing going concern uncertainties to reduce existing diversity in disclosures. • An organization would determine the need for disclosures by assessing the likelihood that the organization would be unable to meet its obligations as they become due within 24 months after the financial statement date.

37. 8 Investment disclosure reminders

38. Investment Disclosure Reminders ASU 2009-12 - Use of Net Asset Values • Permitted to fair value an investment in a pooled investment fund using NAV • When the investment does not have a readily determinable fair value (defined as): • The fair value of an investment in a mutual fund is readily determinable if the fair value per share/unit is determined and published and is the basis for current transactions. • Generally interpreted as SEC-registered mutual funds • When Practical Expedient is used, other disclosures required, by major category: • Fair value • Significant investment strategies • Normal redemption terms • Liquidity restrictions (e.g. side pockets, lock-ups, gates) • Hierarchy • Level 2 – if company can redeem at NAV in near term • Level 3 – if company cannot redeem at NAV in near term

39. Investment Disclosure Reminders ASU 2010-06 – Fair Value Measurements & Disclosures • Disclose separately the amounts of transfers in and out of Level 1 and 2 and explain reasons • Disclose valuation techniques and inputs used in Level 2 and 3 fair value measurements • Fair value hierarchy table and Level 3 roll-forward table to be disaggregated by major security types • Major security types shall be based on the nature and risks of the security and shall consider: • Shared activity or business sector • Vintage • Geographic concentration • Credit quality • Economic characteristic • Level 3 roll-forward to separately disclose purchases, sales, issuances and settlements (gross basis)

40. Investment Disclosure Reminders ASU 2010-06 – FASB Illustrative Disclosure

41. Investment Disclosure Reminders ASU 2011-04 – Fair Value Measurement • Quantitative disclosures of unobservable inputs used in fair value measurements • e.g. Residential MBS (prepayment rate, probability of default, loss severity) • Not required to disclose if entity does not use unobservable inputs (uses 3rd party pricing) • Not required to disclose unobservable inputs if entity uses the practical expedient (i.e. NAV) • For Level 3 investments: • Description of valuation process in place and how entity decides its valuation policies • Information about sensitivity of level 3 FV measurement to changes in unobservable inputs (Non-public entities are exempt from this provision) • For items not measured at FV in balance sheet but for which FV is required to be disclosed (e.g. HTM investments carried at amortized cost), the FV hierarchy categorization (i.e. Level 1, 2, or 3) (Non-public entities are exempt from this provision) • Other non-public entity exemptions: • Information about transfers between Level 1 and Level 2 of the fair value hierarchy

42. Investment Disclosure Reminders ASC 320 – Available-for-sale investments • Other than temporary impairment assessment (OTTI) • Equity – intent and ability to retain investment for sufficient time to allow for anticipated recovery in value • Debt – if intends to sell or may be required to sell the security before recovery of its amortized cost basis, or if there is a credit loss • Additional Disclosures: • Cost • FV • Gross unrealized gains, gross unrealized losses • Maturity information • For investments in URL position, aggregate FV, number of positions, cause of impairment, severity and duration of impairment, split by < > 12 months • Proceeds from sale, gross realized gains, gross realized losses

43. Contact information Carrie Brown cabrown@deloitte.com Melanie Snyman melanie.snyman@ky.pwc.com David Watt davidwatt@Kpmg.ky