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From Model Audit Rule compliance to financial statement audit support, Wipfli can help your organization maintain stakeholder confidence. Our industry-experienced professionals can give you the insights and guidance you need to effectively enhance transparency, accountability and compliance.
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Navigating the NAIC’s revised standards for bond accounting
In a significant development for bond accounting, the National Association of Insurance Commissioners (NAIC) approved amendments to Statements of Statutory Accounting Principles (SSAP) 26R and 43R. These amendments, effective as of January 1, 2025, mark a pivotal shift toward a more nuanced approach to defining and accounting for bonds and bond-like securities. Here are the key aspects of the revised standards and their implications for insurance companies’ financial reporting and accounting practices: Bond accounting amendments The NAIC’s amendments to SSAP 26R and 43R address the growing complexity and diversity of financial instruments that resemble bonds but do not fit neatly into traditional bond categories. Historically, many esoteric securities that appeared bond-like were reported on Schedule D of the Annual Statement. However, as the market for such securities evolved, the need for a more refined classification system became apparent. The new standards introduce a principle-based approach designed to better differentiate between true bonds and other securities with bond-like characteristics. This approach aims to enhance the consistency and accuracy of financial reporting by providing clearer guidance on where and how these instruments are reported and accounted for. Key new provisions include: Principle-based definition of bonds : The amendments provide a principle-based definition of what constitutes a bond. This revised definition focuses on the core characteristics of bonds, including the nature of the issuer, the security’s payment structure and its risk profile. Securities that do not meet these criteria will no longer be reported as bonds on Schedule D. Classification : The principle-based accounting approach offers a flexible framework for classifying bond-like securities. Instead of rigid rules, the approach allows for professional judgment in determining the appropriate classification. This flexibility is intended to accommodate the diverse and evolving nature of financial instruments. New reporting requirements : Securities that fall outside the new definition of bonds will be reported on different schedules in the Annual Statement, reflecting their distinct nature and accounting treatment. This change aims to minimize the diversity in the practice of complex securities and helps ensure that financial statements provide a true representation of a company’s financial position related to these securities. Impact on accounting practices : The amendments require adjustments to accounting practices, including the valuation, recognition and reporting of bond-like securities. Insurance companies will need to review their portfolios and potentially reclassify various instruments based on the new definitions and guidance. Implications for insurers By refining the classification of bond-like securities, the new standards help improve financial reporting by providing clearer guidelines that enhance financial statements’ transparency and consistency. However, the introduction of new reporting requirements may add complexity to financial reporting processes. Depending on the nature of securities held by an insurer, adapting to the new standards may involve significant operational changes. The principle-based approach, while flexible, requires careful judgment and thorough documentation to support classification decisions. Companies may need to revise internal controls, update accounting policies and potentially engage with external professionals to help ensure a smooth transition. They may also need to invest in training and systems to help ensure compliance with the updated standards. Preparing for the transition The new revisions for bond accounting will first be reported in a few months, with the March 31, 2025, quarterly statement. Insurance companies can prepare for implementation by: Assessing the impact : Conduct a thorough analysis of your current portfolios to identify securities that may be affected by the changes. This includes evaluating the nature of each instrument and determining how it aligns with the new definitions. Updating policies and procedures : Revise accounting policies and procedures to reflect the new reporting requirements and classification criteria. This may involve updating internal documentation and ensuring that staff are trained on the new guidelines. You should also be providing training so that your associates are well-versed in the principle-based approach. Assessing systems and third-party providers: Ensure that systems and outsourced investment accounting and financial reporting service providers are prepared for the new reporting requirements. Most statutory financial reporting service providers and bond accounting firms that specialize in serving insurers are informed of and implementing changes needed to comply with these new standards. However, the ultimate responsibility for ensuring accurate accounting and financial reporting rests with each insurer’s management. It’s critical that management take a proactive approach, regularly engaging with their service providers to be sure that the transition will be done as accurately and as smoothly as possible.
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Top 10 accounting tips to make life easier
You finally have the year closed, and your CPA firm has completed its annual audit and tax work. Now, how can you make the next year more stress-free for your organization? Our accounting professionals have created a top 10 accounting tips list just for you so you can make your year run as effectively as a well-oiled machine. #1: Organize files — both paper and digital Easier said than done, right? But seriously, this could be the one thing you might have been putting off for months that could lead to the highest reduction in your department’s waste (and, in turn, generate increased productivity). Think of organization in two different ways: paper organization and digital organization. Although we’re living in a digital world, there is still a need for some paper trails. But there’s also room for improvement. Even if your department has reduced the use of paper and thus the need for bulky storage cabinets, take a look at what you really need to retain on paper and how you can more effectively store that information for quick retrieval. The same goes for digital files. We continue to add folders and subfolders to our computers to store our files. How often do we go through that storage system and “clean up” files we no longer need? Also, take a look at how you are storing files. Does it make sense? Do you need to keep a separate file for each month, or can you move old files to a different location after a set amount of time? Should some files be stored on the network for everyone to access? These questions and others should be answered periodically so you can assess the best use of space on your computer. #2: Let your accounting software work for you Perhaps you think of your accounting software the same way you do that old Tupperware™ container in your refrigerator that hasn’t moved for three weeks — you work around it and try to avoid opening it at all costs! But while your accounting software might not be perfect, it likely has several features you can utilize to become more efficient and effective in your role. First, utilize those automatic monthly entries. You probably use them for things like prepaids and accruals, but are there other areas that you could use the feature for? How about your monthly debt payment? Of course principal and interest are different each month, but if you know the annual amount for each, you could set up an automatic entry and record the monthly interest on more of a “straight line” basis. You may not match up to the bank each month, but at the end of the year, you should be right on. Hopefully you are also utilizing your accounting system’s ability to manage a budget. Budgets can be a powerful tool, but it can be quite cumbersome if you have to key monthly financial data into an Excel spreadsheet just to compare it to the budget. Most systems allow you to enter and manage a budget internally and produce reports periodically to compare actual results to budgeted numbers. There’s also the bank reconciliation tool your software has embedded in it. Are you using it? By manually keeping an Excel spreadsheet to perform a bank reconciliation, you are creating an additional administrative burden that might be unnecessary. Excel is a great tool, but there are times when we overuse Excel and create unnecessary schedules and reconciliations that your accounting software is likely equipped to perform for you. Finally, make sure you take the time to update your accounting system periodically. Some of your frustrations may come from the fact that you are not running the latest and greatest version. #3: Make a list of month-end close procedures A large portion of our monthly responsibility relates to that sometimes dreaded month-end close process. We suggest taking some time to analyze this process. Before you start making recommendations to change things, however, the first step is to completely understand the process. Start by making a checklist of steps that need to be completed in order to close out the month. This might be a project that cannot be completed by one person alone. If you have multiple people contributing to the monthly close process, be sure to include their duties and responsibilities in the checklist so you have a complete list compiled. #4: Know that timeliness is everything Now that you have this list of “duties,” it’s time to start analyzing the process. Ask yourself which of these duties should be performed first and which need to wait until later in the process. Can a few of the duties even be performed before the month is actually complete? Another thing to consider is materiality in relation to timing. Do you need to analyze all accounts on a monthly basis, or are there some accounts you can review on a quarterly basis? This analysis should be based on the risk of error with that account and the volume and dollar value of the respective transactions in that account. If you have an account, such as prepaid insurance, with very little risk, very few transactions and not very many dollars, maybe you could consider performing a formal reconciliation of that account on a quarterly or semiannual basis rather than a monthly basis. Obviously this is not something you would want to implement on a cash account (high risk, large number of transactions and large dollars going in and out throughout the month). However, if you could eliminate some accounts from your monthly reconciliation list, your process could become a little more manageable. #5: Delegate tasks that are low risk Using the aforementioned “list” in #3 above, consider examining whether the right people are performing the risk tasks. Delegation is a powerful thing. And you want to delegate based on risk. While you might keep the higher-risk accounts, it is probably time to think about using the staff you have to help with the other tasks. Like many accounting departments in small businesses, you may have a very limited staff to pull from. In fact, you might be the only one in the accounting department. Don’t let that stop you. Think outside the box. I have a few clients who have begun using the receptionist for certain low-risk monthly close tasks. This can be advantageous on multiple levels: while you are delegating these tasks off your (full) plate, you are also engaging the receptionist. You might be surprised how much they actually appreciate being able to make a greater contribution to the company, and, in my experience, they have taken their new responsibility very seriously and have produced very accurate results. Other “outside the box” thinking might be to involve a board member in this process. Again, you will want to match their skill set with the task at hand, but this could be another way to not only ease the administrative burden, but also strengthen your internal control structure by eliminating certain duties that create problems with segregation of duties. #6: Gamify your month-end close Now that you have this month-end close process working efficiently, you can up the ante a little. I had one client who used a stuffed monkey called the “adjustments monkey.” When the auditors identified an area in which an adjustment was needed, the stuffed monkey was delivered to that department or person’s desk. While it was all in good fun, you would be surprised at how few adjustments they had the next year. You could use a similar program with the month-end close process. Whoever gets their assigned tasks completed last would get the monkey (or other stuffed animal) for the rest of the month. This could be a lighthearted way to increase the speed of the closing process. You might be surprised at the results you see! #7: Document your policies and procedures Many companies have very good policies and procedures in place to function on a day-to-day basis and prepare accurate and timely financial data. Preparing accurate and timely data is so important to the management of a company because it allows the opportunity to respond and react to situations as quickly as possible. Time is money, right? Unfortunately, these same companies that have great policies and procedures fail to document these policies and procedures. If one key person were to leave, the entire company would be in flux. It’s critical to have policies and procedures written down and saved. If your company has a documented policy and procedures manual, assign someone to analyze and update that manual at least annually. Employee turnover is something we often neglect to think about, but it is inevitable in most organizations and can be planned for. The other thing to consider in this area is cross-training. The more people you have who are capable of performing the functions of others, the more flexibility your organization has. This will also allow you to transition smoothly through times of employee turnover. #8: Manage risk by solving little problems before they become big problems While you are probably familiar with the song from the Disney movie Frozen, “Let it Go,” you don’t necessarily want to take this approach when you notice small differences and errors in your company’s financial data. If you take that approach, you are creating an unnecessary risk that you will let it grow into a larger problem. This is an area we suggest investing time in upfront rather than trying to look back after the fact and determine when and where the problem started. Small problems are always easier to diagnose and fix. Also, by digging into these items on the front end, you might identify other problems and risks that you can avoid in the future. #9: Identify process improvement opportunities A client recently had four different payrolls: one for weekly hourly associates, one for biweekly hourly associates, one for management and one for biweekly salaried associates. It was like that for years. One day, I asked the million-dollar question, “Why?” Amazingly, they didn’t really have an answer (other than, “That’s the way we have always done it.”). They discussed it internally and eventually made the decision to move everyone to the same biweekly payroll. They have since noted large savings in time and money. If you are constantly tracking down data for multiple payrolls, maybe it’s time to make the switch to simplifying your payroll process. What other procedures do you think your company is doing only because “that’s the way we have always done it”? #10: Gain an outside perspective from your CPA While you prefer to handle all of your accounting-related issues internally, don’t be afraid to reach out to your CPA if you encounter an unusual situation or if you are planning on making some substantial changes to your policies and procedures. A fresh look from an outsider can be very beneficial. Reducing stress while increasing efficiency Each of the above 10 process improvements should not only lead directly to saving time and money but also help you drastically reduce your stress at work. By continually analyzing the processes you operate by, you can identify areas that can be improved. Want more accounting tips? Read more here: 10 ways to elevate your financial reports Is expense tracking and reporting a drain on your business? 5 ways revenue recognition will affect you outside of recognizing revenue
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Good News – Now You Can Capitalize a Cloud!
For generally accepted accounting principles (GAAP) to remain relevant in today’s business environment, t he Financial Accounting Standards Board ( FASB) must increasingly address new topics. Whether it’s new financing instruments, investments or technological advances, if it affects inflows or outflows of funds or financial reporting, FASB needs to consider the impact and the corresponding accounting treatment. Cloud computing is one such topic. Examples of cloud computing arrangements (CCAs) include software as a service (SaaS), platform as a service (PaaS) and infrastructure as a service (IaaS). ASU 2018-15 clarifies the accounting for the implementation costs of a hosting arrangement that is specifically a service contract, as well as predominantly aligns the accounting for the implementation costs for hosting arrangements regardless of whether they convey a license to the hosted software. The treatment of implementation costs for all CCAs now follows a similar path. Costs should be evaluated following the rules for internal-use software (ASC Subtopic 350-40), which is a good answer for those looking to spread a portion of the costs over time. The accounting for the service element of a hosting arrangement that is considered a service contract is not affected by the amendments in the update. Additionally, costs to develop or obtain internal-use software that can’t be capitalized under Subtopic 350-40, such as training costs and certain data-conversion costs, also can’t be capitalized for a hosting arrangement that’s a service contract. This means that a customer in a hosting arrangement that’s a service contract can determine which project stage (e.g., preliminary project stage, application development stage or post-implementation stage) an implementation activity relates to. The costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. ASU 2018-15 does establish a subsection of ASC 350-40 specifically for implementation costs of a hosting arrangement that is a service contract. The subsection of ASC 350-40 includes certain requirements specific to hosting arrangements that are service contracts, such as requirements for determining the term of the contract as well as presentation requirements. Term: The term of the contract, over which the capitalized costs will be amortized, is the fixed noncancelable term plus the periods covered by the following options: (a) options to extend the arrangement if the entity is reasonably certain to exercise that option, (b) options to terminate the arrangement if the entity is reasonably certain not to exercise that option and (c) options to extend or not terminate the arrangement that are controlled by the vendor. Entities should periodically assess the estimated term. Presentation: ASU 2018-15 also includes requirements on how the components of CCA that is a service contract are presented in the financial statements: Amortization of capitalized implementation costs should be reported in the statement of income in the same line item as the expense for fees for the hosting arrangement. Capitalized implementation costs should be presented in the balance sheet in the same line item that a prepayment of the fees for the hosting arrangement would be presented. Cash flows from capitalized implementation costs should be reported in the same manner as cash flows for the fees for the hosting arrangement. Effective Dates and Transition The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2019. For all other entities, the amendments are effective for annual reporting periods beginning after December 15, 2020. Early adoption of the amendments in this update is permitted, including adoption in any interim period, for all entities. The amendments should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. If you have any questions about ASU 2018-15 and what your options are, contact Wipfli.
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