Life Insurers Ask for Expanded Hedge Accounting Proposal
Recent comments from the insurance sector advocated that a recent FASB proposal to provide a more flexible hedge accounting technique for managing risk should be expanded to include pre-payable financial liabilities—contracts covering disease, death benefits, and lapse risk In May, the board proposed the “portfolio layer method” to enable companies to use a more flexible hedging model to mitigate risks on pre-payable fixed-rate assets, such as mortgages and mortgage-backed securities. The rules would address risks arising from prepayments, defaults, and other factors affecting the timing and amount of cash flows for portfolios of pre-payable assets. Life insurance companies face similar challenges in hedging interest rate risk on groups of disease and death benefits, according MetLife Inc.’s July 1 comment letter to the board. Under the proposed new portfolio layer method, “these risks would not be incorporated into the hedging relationship and insurers could utilize layers where the aggregate amount of the hedged insurance contract liabilities are anticipated to be outstanding over the periods hedged,” the letter said. In total, the board received 25 comment letters by its July 5 deadline, including from banks and accounting firms.
Advisers on CAMs: ‘Not a lot to Talk About’
Auditors’ reports on critical audit matters (CAM) identify complex accounting areas, but the complexity stems from related transactions and therefore cannot be used as a gauge for more rulemaking by the FASB, a board advisory panel said. Reports with CAMs are not surprising, with much of the information found to be consistent with the highly complex issues that were already disclosed in financial statements, the Financial Accounting Standards Advisory Council (FASAC) said on June 24. “From a preparer perspective— not a big deal, no new news, not a lot to talk about there,” said Cynthia Jamison, a board member for Tractor Supply, Office Depot, Big Lots, Darden Restaurants. “Users did find some value but not a lot of new news in the CAMS— more that the CAMs gave you something to pay attention to and to maybe point to, to look into, but once you do go back into the filings to look at more details, it’s all there.” Some analysts said CAMs may be useful in providing additional context into accounting areas to focus on, pointing to the lack of information in financial statement disclosures in areas such as loss contingencies.
Progress Made in Drafting Revised Audit Standards on Risk Assessment
The AICPA’s Auditing Standards Board (ASB) is planning to discuss revisions made to a proposal that would amend its audit standards related to risk assessment during a videoconference meeting on July 20-22. In August 2020, the board issued a proposed Statement on Auditing Standards (SAS), “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment.” This proposed standard would supersede SAS 122, Statements on Auditing Standards: Clarification and Recodification, as amended, AU-C Section 315, Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and its Environment. The revised proposal was drafted in response to issues identified in comment letters, according to a discussion memo prepared ahead of next week’s meeting. As it currently stands, the board’s goal is to vote on issuing a final standard in August 2021.