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NAIC Policy Statement on Statutory Accounting Principles

By Lewis Cole,2014-05-06 12:28
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NAIC Policy Statement on Statutory Accounting Principles

     ASU 2009-13

    Emerging Accounting Issues Working Group

    Agenda Submission Form

    Form B

Issue: Accounting Standards Update 2009-13, Revenue Recognition: Multiple-Deliverable Revenue

    Arrangements

Description of Transaction/Event/Issue:

    The objective of Accounting Standards Update 2009-13 (ASU 2009-13) is to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 addresses how to separate deliverables and how to measure and allocate arrangement consideration to more than one units of accounting.

Previous GAAP guidance in EITF 00-21: Revenue Arrangements with Multiple Deliverables (EITF 00-21)

    was adopted within INT 04-18. Within this interpretation the Emerging Accounting Issues Working Group noted that even though higher-level literature exists in statutory accounting, some multiple deliverable arrangements may exist or may be created that are outside the scope of existing guidance. In the interpretation the Working Group reached a consensus to adopt the conclusions in EITF 00-21 for non-insurance related activities only as an interpretation to SSAP No. 22, SSAP No. 40, SSAP No. 77 and SSAP No. 81 with modification to change all GAAP references to those applicable for statutory accounting.

    The previous GAAP guidance in EITF 00-21 required a vendor to use vendor-specific objective evidence or third-party evidence of selling price to separate deliverables in a multiple deliverable arrangement. Vendor-specific objective evidence of selling price was the price charged for the deliverable when it is sold separately or, for a deliverable not yet being sold separately, the price established by management with the relevant authority. Third-party evidence of selling price was the price of the vendor’s or any

    competitor’s largely interchangeable products or services in standalone sales or similarly situated customers. If a vendor did not have vendor-specific objective evidence or third-party evidence of selling price for the undelivered elements in an arrangement, the revenue associated with both delivered and undelivered elements were combined into one unit of accounting. Any revenue attributable to the delivered products would have been deferred and recognized as the undelivered elements were delivered. An exception was established in this prior guidance if vendor-specific objective evidence or third-party evidence of the selling price was available for the undelivered elements, but not for the delivered elements. In such situations, the vendor used the residual method to allocate revenue to the delivered element, which resulted in the allocation of the entire discount in the arrangement, if any, to the delivered element.

    The revisions from ASU 2009-13 to the existing GAAP guidance in Accounting Standards Codification Subtopic 605-25 will result with multiple-deliverable arrangements being separated in more circumstances. ASU 2009-13 establishes a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. The revisions also replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant.

    The revisions from ASU 2009-13 eliminate the residual method of allocation and require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement ? 2010 National Association of Insurance Commissioners 1

     ASU 2009-13

proportionally to each deliverable on the basis of each deliverable’s selling price. The revisions from

    ASU 2009-13 also require that a vendor determine its best estimate of selling price in a manner that is

    consistent with that used to determine the price to sell the deliverable on a standalone basis.

The revisions from ASU 2009-13 significantly expand the disclosures related to a vendor’s multiple-

    deliverable revenue arrangement. The following disclosures will be required by similar type of

    arrangement:

    1. Description of the entity’s multiple-deliverable arrangements, which includes the nature and

    terms of the arrangement.

    2. The significant deliverables within its arrangements.

    3. The general timing of their delivery or performance of deliverables

    4. The significant factors and estimates used to determine vendor-specific objective evidence,

    third-party evidence, or estimated selling price and significant changes in the selling price or

    the methodology or the assumptions used to estimate selling price.

    5. The general timing of revenue recognition for separate units of accounting.

Additionally, in the year of adoption, under ASU 2009-13, vendors will be required to disclose

    information that enables users to understand the effect of adopting ASU 2009-13:

    1. A description in the change in the units of accounting.

    2. A description of the change in how a vendor allocates the arrangement consideration to

    various units of accounting.

    3. A description of the changes of the pattern and timing of revenue recognition.

    4. Whether the adoption of ASU 2009-13 is expected to have a material effect on the financial

    statements in the periods after the initial adoption. (If there would be material effect,

    additional quantitative information would be required to satisfy the objective of describing

    the change in accounting principle.)

This revisions from ASU 2009-13 are effective prospectively for revenue arrangements entered into or

    modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. A vendor may

    elect, but will not be required, to adopt the amendments to ASU 2009-13 retrospectively, for all prior

    periods. However, a vendor cannot apply the amendments retrospectively to a period if it is impracticable

    for it to report the change through retrospective application to that prior period.

Accounting Issue:

The accounting issue is whether the Emerging Accounting Issues Working Group should adopt ASU

    2009-13 for statutory accounting. If supported, the following accounting requirements would be modified:

    ? Establish a selling price hierarchy for determining the selling price of a deliverable.

    ? Replace the term “fair value” in the revenue allocation guidance with “selling price” to clarify

    that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a

    marketplace participant.

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     ASU 2009-13

    ? Eliminate the residual method of allocation and require that arrangement consideration be

    allocated at the inception of the arrangement to all deliverables using the relative selling price

    method.

    ? Require that a vendor determine its best estimate of selling price in a manner that is consistent

    with that used to determine the price to sell the deliverable on a standalone basis.

     Authoritative Literature:

    ? ASU No. 2009-13, Revenue Recognition (Topic 605) Multiple-Deliverable Revenue

    Arrangements (ASU 2009-13)

    ? INT 04-18: EITF 00-21: Revenue Arrangements with Multiple Deliverables (INT 04-18) provides

    current statutory accounting guidance on this issue, adopted, with modification, from EITF 00-21

Activity to Date (issues previously addressed by Statutory Accounting Principles WG, Emerging

    Accounting Issues WG, SEC, FASB, other State Departments of Insurance or other NAIC groups):

    Previous adoption, with modification, of INT 04-18: EITF 00-21: Revenue Arrangements with Multiple

    Deliverables (INT 04-18)

NAIC Staff Recommendation:

    NAIC staff provides two alternatives for the Working Group to consider:

    1) If the Working Group wants to continue to be consistent with GAAP on multiple-

    deliverable revenue arrangements, staff recommends that the Working Group issue a

    tentative consensus to adopt ASU 2009-13 in a new interpretation updating the existing

    guidance on this topic to be consistent with GAAP and nullifying the previous guidance in

    INT 04-18. It is staff’s assumption that these are infrequent activities among insurers, but

    are aware they occur. If continued statutory guidance is desired, staff does not see a compelling

    reason to be different from GAAP. As identified within this agenda submission form, the

    revisions from ASU 2009-13 would result with the following:

    ? Establish a selling price hierarchy for determining the selling price of a deliverable.

    ? Replace the term “fair value” in the revenue allocation guidance with “selling price” to

    clarify that the allocation of revenue is based on entity-specific assumptions rather than

    assumptions of a marketplace participant.

    ? Eliminate the residual method of allocation and require that arrangement consideration be

    allocated at the inception of the arrangement to all deliverables using the relative selling price

    method.

    ? Require that a vendor determine its best estimate of selling price in a manner that is

    consistent with that used to determine the price to sell the deliverable on a standalone basis.

    Staff identifies that ASU 2009-13, similar to EITF 00-21, incorporates disclosure requirements.

    Typically, disclosure requirements for statutory accounting are not reflected in interpretations. If

    the Working Group wants to continue providing an interpretation for reporting entity multiple

    deliverable arrangements, the Working Group will need to decide on whether the disclosures are

    desired for statutory accounting, and if so, whether this issue, or the disclosure requirements, shall

    be included within an SSAP. (Recommendations for SSAP revisions will require a referral to the

    Statutory Accounting Principles Working Group.)

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     ASU 2009-13

    2) If the Working Group does not believe guidance is needed for activities that would be

    captured within this guidance (it is staff’s assumption that such instances may likely be

    considered immaterial for most reporting entities), staff would recommend that the

    Working Group nullify INT 04-18 and direct staff to include ASU 2009-13 on the listing of

    nonapplicable interpretations (INT 99-00). Staff recognizes that some reporting entities do

    engage in multiple deliverable arrangements, but is under the impression that these activities

    would not ordinarily be material to insurer operations.

NAIC Staff Review Completed by:

    Julie Gann January 2010

Status:

    On March 26, 2010, the Emerging Accounting Issues Working Group noted that transactions within the

    scope of ASU 2009-13: Revenue Recognition: Multiple-Deliverable Revenue Arrangements (2009-13) are

    infrequent and agreed to expose this agenda item with a tentative conclusion to reject ASU 2009-13

    within INT 99-00: Compilation of Rejected EITFs (INT 99-00) as not applicable to statutory accounting. The Working Group also agreed to tentatively nullify INT 04-18: EITF 00-21: Revenue Arrangements with Multiple Deliverables (INT 04-18).

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