Accounting Standards Update (ASU) 2015-09, Disclosures about Short Duration Contracts

 ASU No. 2015-09 focuses on improving existing disclosure requirements to all insurance entities that issue short-duration contracts.  The main improvements provide increased transparency of significant estimates in measuring the liabilities for unpaid claims and claims expenses and provides additional information to analyse the amount, timing and uncertainty of cash flows from insurance contracts and development of claims estimates. An in-depth discussion of these improvements can be found at our website: ASU 2015-09

Amendments

 Required disclosures (RD) to be included in the notes to the financial statements:

1. Incurred and paid claims development tables by accident year for the most recent reporting period.
2. A reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability with separate disclosure of reinsurance recoverable.
3. For each accident year presented, total of incurred but not reported (IBNR) liabilities plus expected development on reported claims accompanied by description of reserving methodologies (and any changes thereto).
4. For each accident year presented, quantitative information about claim frequency accompanied by a qualitative description of methodologies used for determining claim frequency information (and any changes thereto).

Required supplementary information (RSI) disclosure to be included either in the notes to the financial statements or as a separate schedule:

1. Incurred and paid claims development tables by accident year for all years except for the most recent reporting period.
2. For all claims except health insurance claims, the average annual percentage payout of incurred claims by age.

RD’s plus RSI’s and their audit considerations:

Required disclosures

In forming an opinion, amongst other considerations the auditing standards require the auditor to consider the compliance of the financial statements with accounting principles generally accepted in the United States (US GAAP). If financial statements do not fully comply with US GAAP (including, but not limited to, omissions or errors) the auditor will need to assess the significance of the matter in forming an opinion. Depending on the significance of the matter the auditor may consider modifying the opinion. The auditor will need to assess each scenario individually based on facts and circumstances.

Required supplementary information

The RSI is not part of the basic financial statements, however, the information is considered to be an essential part of financial reporting by the relevant standard setters. In general, standard setters do not expect the auditor’s opinion on the fair presentation of such financial statements in accordance with the applicable financial reporting framework to be affected by the presentation by the entity of the RSI or the failure to present some or all of such RSI.

The audit standards require that the auditor perform some limited procedures on RSI which includes but is not limited to:

• Inquire of management;
• Compare the information for consistency with (i) management’s responses to the foregoing inquiries, (ii) the basic financial statements, and (iii) other knowledge obtained during the audit of the basic financial statements; and,
• Obtain certain written representations from management.

Audit report considerations:

• If all or some of the RSI is presented, the audit report will include additional communications in an “Other Matter” paragraph that is not considered a modification to the audit opinion as follows:
  • A statement that the RSI is required under US GAAP to supplement the basic financial statements.
  • A statement that the RSI, although not part of the basic financial statements, is required by the Financial Accounting Standards Board (FASB), who considers it an essential part of financial reporting.
  • If we are able to complete the procedures required by auditing standards:
    • A statement that we have applied certain limited procedures to the RSI, including a summary of the basic procedures;
    • A statement that we do not express an opinion or provide any assurance on the RSI.
  • If we are unable to complete the procedures required by auditing standards:
    • A statement that we are unable to apply certain limited procedures to the RSI and the reason;
    • A statement that we do not express an opinion or provide any assurance on the RSI.
  • If some of the RSI is omitted, we will include in the “Other Matter” paragraph the following:
    • A statement that management has omitted the missing RSI required by US GAAP;
    • A statement that such missing RSI, although not part of the basic financial statements, is required by FASB, who considers it an essential part of financial reporting;
    • A statement that our opinion on the basic financial statements is not affected by the missing RSI.
  • If the measurement or presentation of the RSI departs materially from US GAAP, a statement that although the auditor’s opinion on the basic financial statements is not affected, material departures from prescribed guidelines exist, including a description of the departure.
  • If the auditor has unresolved doubts about whether the RSI is measured or presented in accordance with prescribed guidelines, a statement that although our opinion on the basic financial statements is not affected, the results of the limited procedures have raised doubts about whether material modifications should be made to the RSI for it to be presented in accordance with guidelines.
• If all of the RSI is omitted, the “Other Matter” paragraph should include (e) above.

The auditing standards generally accepted in the United States of America, AU-C Section 730: Required Supplementary Information, contains illustrative examples of Other Matters paragraphs addressing the scenarios discussed above.

AU-C Section 730 par. A3: Illustration 1- The Required Supplementary Information Is Included, the Auditor Has Applied the Specified Procedures, and No Material Departures Have Been Identified

US GAAP requires that the required supplementary information on page XX be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance.

 AU-C Section 730 par. A3: Illustration 2 – All Required Supplementary Information Omitted

Management has omitted the required supplementary information that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.

 AU-C Section 730 par. A3: Illustration 3 – Some Required Supplementary Information Is Omitted and Some Is Presented in Accordance With the Prescribed Guidelines

US GAAP requires that the included supplementary information be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management’s responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with evidence sufficient to express an opinion or provide any assurance. Management has omitted [the missing required supplementary information] that US GAAP requires to be presented to supplement the basic financial statements. Such missing information, although not a part of the basic financial statements, is required by FASB who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. Our opinion on the basic financial statements is not affected by this missing information.