On the Horizon

Final Standard on Consolidation: Principal versus Agent

In the coming weeks, the FASB expects to issue a final standard intended to improve targeted areas of GAAP that cover consolidation of legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

The standard will address stakeholder concerns that current guidance in certain situations, while operable, does not provide sufficiently useful information for investors.
The standard will address stakeholder concerns that current guidance in certain situations, while operable, does not provide sufficiently useful information for investors.

Stakeholders expressed concerns that current GAAP might require a company or other reporting organization to consolidate a legal entity when:
  • The organization’s contractual rights did not give it the ability to act primarily on its own behalf
  • The organization did not hold a majority of the legal entity’s voting rights, or
  • The organization was not exposed to a majority of the legal entity’s economic benefits or obligations.
The new standard would change existing consolidation guidance that has evolved over the years.
The new standard would change existing consolidation guidance that has evolved over the years. For example, some stakeholders—including asset managers acting on behalf of external investors—are required to reflect the consolidation of assets, liabilities, and financial performance of a legal entity, even though they have no or minimal principal risk in the legal entity.

The new standard is expected to become effective in 2016 for calendar year-end public companies, and early adoption most likely will be permitted in interim periods.

For calendar year-end private companies and not-for-profit organizations, the new standard is expected to become effective in 2017 for annual periods and for interim periods beginning in 2018.

More information on the project can be found here.

Final Standard on Short Duration Insurance Contracts


The FASB is finalizing a standard intended to improve the disclosures for short-duration insurance contracts.

The Board decided to not continue with a comprehensive project on insurance contracts—and instead decided to focus on targeted improvements to insurance accounting.
Prompted by stakeholder feedback on the 2013 insurance proposal, the Board decided to not continue with a comprehensive financial accounting and reporting project on insurance contracts—and instead decided to focus on targeted improvements to insurance accounting. For short-duration contracts, the Board decided to limit the targeted improvements to enhancing disclosures.

The proposed standard will require all insurance companies that issue short-duration contracts to disclose information (aggregated or disaggregated) so that useful information in annual financial statements is not obscured by a large amount of insignificant detail, or the aggregation of items that have different characteristics. Reporting organizations are expected to be required to disclose the following information:
  • Incurred and paid claims development tables
  • Quarterly roll forward of the liability for unpaid claims and claim adjustment expenses
  • The effects of discounting on the financial statements.
Organizations will also be required to disclose significant changes in judgments made in calculating the liability for unpaid claims and claim adjustment expenses, including reasons for the change and the effects on the financial statements.

The Board will establish the effective date in the near future before the standard’s issuance.

More information on the project can be found here.