Statutory Accounting Principles Working Group s11

Attachment I

Ref #2017-37

Statutory Accounting Principles (E) Working Group

Maintenance Agenda Submission Form

Form A

Issue: ASC 606 – Revenue from Contracts with Customers: Review of ASU’s 2014-09, 2016-08 and 2016-12

Check (applicable entity):

P/C Life Health

Modification of existing SSAP

New Issue or SSAP

Interpretation

Description of Issue:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 – Revenue from Contracts with Customers. This ASU is the result of a joint project between FASB and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and IFRS (the IASB issued IFRS 15 – Revenue from Contracts with Customers). ASU 2014-09 created ASC Topic 606 – Revenue from Contracts with Customers. Per ASU 2014-09, the core principle of the guidance in ASC 606 (and IFRS 15) is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

Agenda item 2016-19 was discussed by the Working Group on August 26, 2016. As detailed in agenda item 2016-19 and the Scope and Scope Exceptions in ASC 606-10-15-2, the new revenue recognition guidance does not apply to insurance contracts. As a result of this scope exclusion, the Working Group rejected ASU 2014-09 as not applicable for statutory accounting (with the exception of guidance pertaining to principal versus agent considerations and equity-based payments to non-employees, as detailed below) and retained the current revenue recognition guidance as specified within the individual SSAPs. The Working Group requested that NAIC staff further review guidance related to principal versus agent considerations and equity based payments to non-employees. NAIC staff noted that there were additional ASUs that had been issued subsequent to the time that agenda item #2016-19 had been completed that relate to revenue recognition and Topic 606. The following are ASUs that were reviewed as part of this agenda item are ASU 2016-08 – Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-12 – Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and will be reviewed as part of this this agenda item.

Consistent with the proposal to reject ASU 2014-09, staff recommends that ASU 2016-12 be rejected as not applicable to statutory accounting. This ASU clarifies a number of items from ASU 2014-09, including assessing the collectability criterion, updates to the presentation of sales taxes and other similar taxes collected from customers, non-cash considerations, contract modifications and completed contracts at transition, and technical corrections to clarify the periods covered by guidance from Topic 606. As was noted in the agenda item 2016-19, this guidance does not apply to insurance contracts. As this does not impact principal versus agent, NAIC staff recommend that ASU 2016-12 be rejected as not applicable for statutory accounting in Appendix D.

In ASC Topic 606-10-55-36 to 606-10-55-40 the language states that when another party is involved in providing goods or services to a customer, the entity should determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (that is, the entity is a principal) or to arrange for the other party to provide those goods or services (that is, the entity is an agent). An entity is an agent if the entity’s performance obligation is to arrange for the provision of goods or services by another party. When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the other party to provide its goods or services. An entity’s fee or commission might be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party. NAIC staff recommends with agenda item 2017-37 rejecting the guidance that comes from the principal versus agent considerations as not applicable to statutory accounting.

Agenda item 2016-19 noted that NAIC staff would further review equity based payments to non-employees from ASU 2014-09, which impacted ASC Topic 505-50. This guidance covers instances where equity-based instruments are used as payment for goods or services rendered. The changes from ASU 2014-09 cover non-employees only. The primary intent of the updates to ASC Topic 505-50 is to incorporate language from the new revenue recognition guidance in ASC Topic 606, which was created by ASU 2014-09. The Working Group rejected the changes to revenue recognition because insurance contracts are out of the scope of the guidance. NAIC staff recommends with agenda item 2017-37 rejecting the guidance that comes from the principal versus agent considerations, as such NAIC staff recommend that the guidance pertaining to share-based payments to non-employees be rejected for statutory accounting.

Existing Authoritative Literature: Refer to Appendix D—GAAP Cross Reference to Statutory Accounting Principles for GAAP Pronouncements and Working Groups actions pertaining to ASC Topic 605. Premium revenue recognition is detailed throughout the SSAPs, including the following: SSAP No. 51—Life Contracts; SSAP No. 53—Property Casualty Contracts – Premiums; SSAP No. 54—Individual and Group Accident and Health Contracts and SSAP No. 57—Title Insurance.

Activity to Date (issues previously addressed by the SAPWG, Emerging Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups): Agenda item 2016-09 address revenue recognition and 2017-05 addressed share based payment accounting.

Information or issues (included in Description of Issue) not previously contemplated by the SAPWG: None

Convergence with International Financial Reporting Standards (IFRS): ASU 2014-09, which created ASC Topic 606, and IFRS 15 are the end result of the joint project between the FASB and IASB to improve financial reporting by creating common revenue recognition guidance. Minor differences between ASC 606 and IFRS 15 are detailed in ASU 2014-09.

Staff Recommendation:

Staff recommends the Working Group move this agenda item to the active listing, categorized as nonsubstantive and expose revisions to reject ASU 2014-09, 2016-08 and 2016-12 in SSAP No. 47—Uninsured Plans. This recommendation is based on the language for net basis revenue reporting issues created by the revenue recognition guidance for an agent as well as the share-based payments to non-employees. With this, we recommend that all guidance related to principal versus agent with regards to revenue recognition be rejected as not applicable to statutory accounting. NAIC staff will further inquire with regulators and industry whether there are any other SSAPs with which this guidance should be included.

Staff Review Completed by: Jake Stultz, NAIC Staff – October 2017

Status:

On November 6, 2017, the Statutory Accounting Principles (E) Working Group moved this agenda item to the active listing, categorized as nonsubstantive, and exposed revisions to reject ASUs 2014-09, 2015-14, 2016-08, 2016-10 and 2016-12 in SSAP No. 47, as detailed below and in agenda item 2016-19.

Note that the combination of this agenda item which reviewed the principal versus agent issues and share based payment issues and agenda item 2016-19 complete the review of ASU 2014-09; ASU 2015-14, which are rejected in their entirety.

Proposed Revisions to SSAP No. 47:

(New paragraph under Relevant Literature. An identical paragraph is recommended in Ref #2016-19)

Relevant Literature

16. This statement rejects ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU 2015-14, Revenue From Contracts With Customers (Topic 606); ASU 2016-08, Revenue From Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.

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