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Fair Value Disclosure Improvements
(SSAP 100 - Fair Value Measurements - Modified)

“Fair Value” has become as common as “Google,” “Twitter,” or even “Facebook.” No matter if you’re watching your favorite business TV show or reading various business periodicals, you are sure to run across this topic. Fair value accounting and disclosures have been treated differently among statutory accounting, Generally Accepted Accounting Principles (GAAP), and even International Financial Reporting Standards (IFRS). Recently, Blackman’s insurance group published articles (Fair Value Measurements: SSAP 100 versus ASC 820 [fka “FAS 157”]) and alerts (Fall NAIC Updates: Potential Changes to SSAP 100) on this topic. On November 29, 2010 the National Association of Insurance Commissioners (NAIC) Statutory Accounting Principles Working Group (SAPWG) adopted modifications to Statement of Statutory Accounting Principles 100 – Fair Value Measurements effective for December 31, 2010 reporting.

Modifications

• Eliminates the requirement to differentiate fair value measurements between “recurring” and “non-recurring” schedules
• Clarifies that disclosure requirements of fair value are for items that are measured and “reported” at fair value in the statement of financial position (for 2010)
• Incorporates a new disclosure (for 2011) that requires documentation of the fair value hierarchy for all items that are disclosed with a fair value measurement but may not be reported at fair value in the statement of position

The last modification above will not be effective until 2011 on an annual basis. It is anticipated that this new disclosure will be mostly accomplished by a modification to the existing investment schedules in the annual statement.

Why did the SAPWG do this?

This is one of the few times that the NAIC has actually been out in front of the Financial Accounting Standards Board (FASB) on new accounting guidance and disclosures. The FASB is currently considering similar modifications to ASC Topic 820, Fair Value Measurements and Disclosures. Although the GAAP modifications have not been approved by the FASB, the SAPWG believes that the above revisions will assist in the application of SSAP 100 guidance for year-end 2010.

Disclosures

A reporting entity should disclose information that helps users of financial statements to assess the valuation techniques and inputs used to develop those measurements for assets and liabilities that are measured and “reported” at fair value in the statement of financial position after initial recognition. The key here is the term “reported.” An example would be a bond with an NAIC designation of 2 versus 4. The bond with the NAIC designation of 2 would be reported at amortized cost and would not be subject to disclosure in the fair value hierarchy, whereas the bond with the NAIC designation of 4 could be reported at fair value at the end of the reporting period and would require disclosure in the fair value hierarchy. This disclosure would be broken down into appropriate classes as well, based upon annual-statement instructions.

The disclosure would be similar to the following chart:

SSAP 100 also requires disclosure of any significant transfers to or from Levels 1 and 2 and the reasons for those transfers. The significant-transfers disclosure should be reflected separately within the notes to the statutory financial statements.

For fair value measurements categorized within Level 2 and Level 3 of the fair value hierarchy, the reporting entity shall disclose the description of the valuation technique(s) and the inputs used in the fair value measurement. If there has been a change in the valuation technique (for example, changing from a market approach to an income approach or the use of an additional valuation technique), the reporting entity shall disclose that change and the reason(s) for making it.

SSAP 100 also requires a reconciliation from the opening balances to the closing balances for assets and liabilities measured and reported at fair value and categorized in Level 3 of the fair value hierarchy. An example of this disclosure would be as follows:

A similar table should be presented for liabilities measured at fair value.

For additional information about SSAP 100 – Fair Value Measurements please contact Jeff Dertz, Partner, at 312-980-3224 or jdertz@blackmankallick.com or Andrew Rouse, Senior Manager, at 312-980-3236 or arouse@blackmankallick.com.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.