Ref #2014-36
Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: ASU 2013-06 – Not-For-Profit Entities – Services Received from Personnel of Affiliate
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue: ASU 2013-06, Not-for-Profit Entities, Services Received from an Affiliate (ASU 201306) was issued in April 2013 as a consensus position of the FASB Emerging Issues Task Force. This ASU
was issued to address diversity in practice regarding the recognition of services provided by the personnel of
an affiliate, when those services are provided at no-charge to a not-for-profit affiliated entity.
The amendments in this ASU apply to not-for-profit entities, including not-for-profit, business-oriented health
care entities, which receive services from personnel of an affiliate that directly benefit the recipient not-forprofit entity and for which the affiliate does not charge the recipient not-for-profit. This ASU defines
“charging” as requiring payment from the recipient not-for-profit entity at least for the approximate amount of
the direct personnel costs (e.g., compensation and payroll-related fringe benefits) incurred by the affiliate in
providing a service to the recipient not-for-profit entity or the approximate fair value of that service.
The amendments in this ASU require the recipient not-for-profit entity to recognize all services received from
personnel of an affiliate that directly benefit the recipient not-for-profit entity. These services should be
measured at the cost recognized by the affiliate for the personnel providing those services. However, if
measuring a service received at cost will significantly overstate or understate the value of the services
received, then the not-for-profit may elect to record the services received at the affiliate cost in providing that
service, or the fair value of that service.
The amendments in this ASU are effective prospectively for fiscal years beginning after June 15, 2014, and
for interim and annual periods thereafter. Early adoption is permitted.
Existing Authoritative Literature:
SSAP No. 25—Accounting for and Disclosures About Transactions with Affiliates and Other Related Parties
identifies that related party transactions are subject to abuse because reporting entities may be induced to
enter transactions that may not reflect economic realities or may not be fair and reasonable to the reporting
entity or its policyholders. As such, related party transactions require specialized accounting rules and
increased regulatory scrutiny. Guidance is currently included in SSAP No. 25, paragraphs 17-18 specifically
for related party transactions involving services:
17.
Transactions involving services between related parties can take a variety of different forms.
One of the significant factors as to whether these transactions will be deemed to be
arm’s length is the amount charged for such services. In general, amounts charged for
services are based either on current market rates or on allocations of costs.
Determining market rates for services is difficult because the circumstances surrounding
each transaction are unique. Unlike transactions involving the exchange of assets and
liabilities between related parties, transactions for services create income on one party’s
books and expense on the second party’s books, and therefore, do not lend themselves to
the mere inflation of surplus. These arrangements are generally subject to regulatory
approval.
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18.
Transactions involving services provided between related parties shall be recorded at
the amount charged. Regulatory scrutiny of related party transactions where amounts
charged for services do not meet the fair and reasonable standard established by
Appendix A-440, may result in (a) amounts charged being recharacterized as dividends
or capital contributions, (b) transactions being reversed, (c) receivable balances being
nonadmitted, or (d) other regulatory action. Expenses that result from cost allocations
shall be allocated subject to the same fair and reasonable standards, and the books and
records of each party shall disclose clearly and accurately the precise nature and details of
the transaction. See SSAP No 70—Allocation of Expenses for additional discussion regarding
the allocation of expenses.
NAIC Model Act #440 – Insurance Holding Company System Regulatory Act Section 5.A.(1)(c)
stipulates that charges or fees for services performed shall be reasonable.
A.
Transactions Within an Insurance Holding Company System
(1)
Transactions within an insurance holding company system to which an insurer
subject to registration is a party shall be subject to the following standards:
(a)
The terms shall be fair and reasonable;
(b)
Agreements for cost sharing services and management shall include such
provisions as required by rule and regulation issued by the commissioner;
(c)
Charges or fees for services performed shall be reasonable;
(d)
Expenses incurred and payment received shall be allocated to the insurer in
conformity with customary insurance accounting practices consistently
applied;
(e)
The books, accounts and records of each party to all such transactions shall
be so maintained as to clearly and accurately disclose the nature and details
of the transactions including such accounting information as is necessary to
support the reasonableness of the charges or fees to the respective parties;
and
(f)
The insurer’s surplus as regards policyholders following any dividends or
distributions to shareholder affiliates shall be reasonable in relation to the
insurer’s outstanding liabilities and adequate to meet its financial needs.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Staff Recommendation:
Staff has proposed that the Working Group move this item to the nonsubstantive active listing and
expose nonsubstantive revisions to SSAP No. 25 to reject ASU 2013-06 for statutory accounting as
guidance requiring reasonable charges is detailed in Model Act #440. Revisions are proposed to SSAP
No. 25 to incorporate references and disclosures for services provided.
Proposed Revisions to SSAP No. 25 – Disclosures for Services:
17.
Transactions involving services between related parties can take a variety of different forms.
One of the significant factors as to whether these transactions will be deemed to be arm’s
length is the amount charged for such services. In general, amounts charged for services are
based either on current market rates or on allocations of costs. Determining market rates for
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services is difficult because the circumstances surrounding each transaction are unique.
Unlike transactions involving the exchange of assets and liabilities between related parties,
transactions for services create income on one party’s books and expense on the second
party’s books, and therefore, do not lend themselves to the mere inflation of surplus. These
arrangements are generally subject to regulatory approval.
18.
Transactions involving services provided between related parties shall be recorded at the
amount charged. Regulatory scrutiny of related party transactions where amounts charged
for services do not meet the fair and reasonable standard established by Appendix A-440
(including services provided at no charge), may result in (a) amounts charged (or the fair
value of services received) being recharacterized as dividends or capital contributions, (b)
transactions being reversed, (c) receivable balances being nonadmitted, or (d) other
regulatory action. Expenses that result from cost allocations shall be allocated subject to the
same fair and reasonable standards, and the books and records of each party shall disclose
clearly and accurately the precise nature and details of the transaction. See SSAP No 70—
Allocation of Expenses for additional discussion regarding the allocation of expenses.
Disclosures
19.
The financial statements shall include disclosures of all material related party transactions. In
some cases, aggregation of similar transactions may be appropriate. Sometimes, the effect of
the relationship between the parties may be so pervasive that disclosure of the relationship
alone will be sufficient. If necessary to the understanding of the relationship, the name of the
related party should be disclosed. Transactions shall not be purported to be arm’s-length
transactions unless there is demonstrable evidence to support such statement. The
disclosures shall include:
a.
The nature of the relationships involved;
b.
A description of the transactions for each of the periods for which financial
statements are presented, and such other information considered necessary to
obtain an understanding of the effects of the transactions on the financial statements.
Exclude reinsurance transactions, any non-insurance transactions which involve less
than ½ of 1% of the total admitted assets of the reporting entity, and cost allocation
transactions. The following information shall be provided if applicable:
c.
i.
Date of transaction;
ii.
Explanation of transaction;
iii.
Name of reporting entity;
iv.
Name of affiliate;
v.
Description of assets received by reporting entity;
vi.
Statement value of assets received by reporting entity;
vii.
Description of assets transferred by reporting entity; and
viii.
Statement value of assets transferred by reporting entity.
ix.
Information on transactions involving services received and/or transferred by
the reporting entity, including the fair value of the services received or
transferred. (If fair value is not determinable, the cost to the related party
providing the services shall be used as a proxy.)
The dollar amounts of transactions for each of the periods for which financial
statements are presented and the effects of any change in the method of establishing
the terms from that used in the preceding period;
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20.
d.
Amounts due from or to related parties as of the date of each balance sheet
presented and, if not otherwise apparent, the terms and manner of settlement;
e.
Any guarantees or undertakings, written or otherwise, shall be disclosed in
accordance with the requirements of SSAP No. 5R. In addition, the nature of the
relationship to the beneficiary of the guarantee or undertaking (affiliated or
unaffiliated) shall also be disclosed;
f.
A description of material management or service contracts and cost-sharing
arrangements involving the reporting entity and any related party. This shall include,
but is not limited to, sale lease-back arrangements, computer or fixed asset leasing
arrangements, and agency contracts, which remove assets otherwise recordable
(and potentially nonadmitted) on the reporting entity’s financial statements;
g.
The nature of the control relationship whereby the reporting entity and one or more
other enterprises are under common ownership or control and the existence of that
control could result in operating results or financial position of the reporting entity
significantly different from those that would have been obtained if the enterprises
were autonomous. The relationship shall be disclosed even though there are no
transactions between the enterprises; and
h.
The amount deducted from the value of an upstream intermediate entity or ultimate
parent owned, either directly or indirectly, via a downstream subsidiary, controlled, or
affiliated entity, in accordance with the Purposes and Procedure Manual of the NAIC
Securities Valuation Office, “Procedures for Valuing Common Stocks and Stock
Warrants.”
Refer to the preamble for further discussion regarding disclosure requirements.
Relevant Literature
21.
This statement adopts FASB Statement No. 57, Related Party Disclosures with a modification
to paragraph 3 to require disclosure of compensation arrangements, expense allowances,
and other similar items in the ordinary course of business.
22.
This statement rejects ASU 2013-06, Not-For-Profit Entities, Services Received from
Personnel of an Affiliate and AICPA Accounting Interpretations, Business Combinations:
Accounting Interpretations of APB Opinion No. 16, #39, “Transfers and Exchanges Between
Companies Under Common Control.”
23.
Guidance in paragraph 7 was incorporated from SSAP No. 96 as discussed in Issue Paper
No. 128—Settlement Requirements for Intercompany Transactions, An Amendment to SSAP
No. 25—Accounting for and Disclosures about Transactions with Affiliates and Other Related
Parties. SSAP No. 96 was nullified in 2011 with the guidance from that SSAP retained within
this SSAP.
Staff Review Completed by:
Julie Gann – NAIC – October 10, 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 SSAP No. 25 to reject ASU 2013-06 as
guidance requiring reasonable charges is detailed in Model Act #440. Exposed revisions, as illustrated above,
also propose to incorporate references and disclosures for services provided.
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from Affiliate.docx
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