Ref #2014-34
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2014-13 – Consolidation of Collateralized Financing Entity
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: ASU 2014-13, Measuring the Financial Assets and Financial Liabilities of a
Consolidated Collateralized Financing Entity (ASU 2014-13) was issued in August 2014. This ASU was
issued to address diversity in practice in accounting for the measurement difference of the fair value of
financial assets and the fair value of financial liabilities of a consolidated collateralized financing entity. This
ASU identifies that the fair value of a collateralized financing entity’s financial assets may differ from the fair
value of its financial liabilities even when the financial liabilities have recourse only to the financial assets.
Collateralized Financing Entity:
A variable interest entity that holds financial assets, issues beneficial interests in those financial
assets, and has no more than nominal equity. The beneficial interests have contractual recourse only
to the related assets of the collateralized financing entity and are classified as financial liabilities. A
collateralized financing entity may hold nonfinancial assets temporarily as a result of default by the
debtor on the underlying debt instruments held as assets by the collateralized financing entity or in an
effort to restructure the debt instruments held as assets by the collateralized financing entity. A
collateralized financing entity also may hold other financial assets and financial liabilities that are
incidental to the operations of the collateralized financing entity and have carrying values that
approximate fair value (for example, cash, broker receivables, or broker payables).
With the measurement alternative guidance in ASU 2014-13, a reporting entity would have the option to use
the more observable fair value (either for the financial assets or the financial liabilities) to measure both the
financial assets and financial liabilities and eliminate differences in the fair value assessments used in
consolidation. This alternative was deemed appropriate as the beneficial interests issued by the collateralized
financing entity would only have recourse to the assets of the collateralized financing entity.
If a reporting entity does not elect to use the alternative method, the reporting entity would separately measure
the fair value of the financial assets and financial liabilities per the fair value measurement guidance, and the
ASU prescribes that any differences between the fair values would be reflected in earnings and attributed to
the reporting entity in the consolidated statement of net income.
In electing to use the more observable fair value (rather than just the fair value of financial assets), it was
noted that in many instances the fair value of the financial liabilities of the collateralized financing entity is
more observable then the fair value of its financial assets. Mortgage-backed structures were noted as an
example, as the underlying assets are often restricted from sale, and thus have little or no observable
transactions to be relied upon in a fair value measurement. In other instances, the beneficial interests may be
traded, and therefore the inputs to their fair value measurements can be more observable.
Existing Authoritative Literature:
SSAP No. 3—Accounting Changes and Corrections of Errors rejects ARB No. 51, Consolidated Financial
Statements. Statutory accounting utilizes legal entity reporting, and does not incorporate the concept of
consolidated financial statements.
© 2014 National Association of Insurance Commissioners 1
Ref #2014-34
SSAP No. 43R—Loan-backed and Structured Securities includes beneficial interests within its scope. SSAP
No. 43R utilizes an amortized cost measurement, or the lower of amortized cost or fair value depending on
the NAIC designation.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): Pursuant to a prior referral from the
Valuation of Securities (E) Task Force, the Statutory Accounting Principles (E) Working Group will discuss
the measurement method for certain beneficial interests. This discussion is currently planned as a component
of the Investment Classification Project (Ref #2013-36). Regardless, if certain beneficial interests are
concluded to require a fair value measurement, it should not impact the decision on ASU 2014-13, as this
ASU is specific to consolidated financial statements.
Additionally, the Working Group has a pending project (Ref #2009-15) to review the GAAP guidance on
variable interest entities. This project is on hold as the FASB is still discussing the VIE consolidation
guidance for principles and agents. It is not anticipated that the Working Group would consider consolidation
of VIEs as a result of the GAAP guidance, rather, the Working Group will likely consider the determinants
resulting in consolidation for disclosure purposes and assess the statutory guidance for related parties.
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Staff Recommendation:
It is staff’s recommendation that the Working Group move this item to the nonsubstantive active listing
and expose nonsubstantive revisions to Issue Paper No. 99—Nonapplicable GAAP Pronouncements to
reject ASU 2014-13 as not applicable to statutory accounting as the statutory financial statements are
not consolidated.
Staff Review Completed by:
Julie Gann – NAIC – October 8, 2014
Status:
On November 16, 2014, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to Issue Paper No. 99 to reject ASU 201413 as not applicable to statutory accounting.
G:\DATA\Stat Acctg\3. National Meetings\A. National Meeting Materials\2014\fall\NM Exposures\14-34 ASU 2014-13 - Consolidation of
Collateralized Financing Entity.docx
© 2014 National Association of Insurance Commissioners 2
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Issue: ASU 2014-13 – Consolidation of Collateralized Financing Entity