Accounting Policy Update - New Standards and Regulatory Projects

1. Accounting Policy UpdateInstructor:Jennifer Lynch, Sr. Manager Accounting PolicyDecember 10, 2018 TIAA CONFIDENTIAL

2. Agenda and Learning Objectives TIAA CONFIDENTIAL

3. Agenda Standard Setters Regulators Upcoming Implementation Standard Timeline TIAA CONFIDENTIAL

4. Learning Objectives • Course Summary • This course will provide participants with a quick overview of newly adopted accounting standards and emerging regulatory projects. • Objectives: • Explain the foundations of the standard setters and other regulators • Describe key accounting guidance updates for US statutory and GAAP and IFRS accounting guidance updates • Describe progress on regulatory projects TIAA CONFIDENTIAL

5. Standard setters and other regulators TIAA CONFIDENTIAL

6. Standard setters Standard setters TIAA CONFIDENTIAL

7. Other regulators Government Regulators Department of the Treasury Internal Revenue Service (IRS) Federal Deposit Insurance Corporation (FDIC) Office of the Comptroller of Currency (OCC) Financial Industry Regulatory Authority (FINRA) Federal Reserve Bank/Board of Governors Financial Conduct Authority (FCA) – United Kingdom Industry/Standards Regulators Federal Insurance Office (FIO) Employee Retirement Income Security Act (ERISA) Department of Financial Services (DFS)

8. Other regulators • Engage and influence industry groups, regulators, and trade associations to advocate responsible public policy and regulations • American Council of Life Insurance (ACLI) Committees • Insurance Industry Interested Parties (IP’s) • Life Insurance Council of New York (LICONY) • Securities Industry and Financial Markets Association (SIFMA) • Investment Company Institute (ICI) • National Council of Real Estate Investment Fiduciaries (NCREIF) • NAIC National Meetings – State insurance commissioners and staff • AICPA Experts Panels (Investment Company; Insurance) • American Bankers’ Association (ABA)

9. Upcoming guidance implementation TIAA CONFIDENTIAL

10. Upcoming guidance implementation Monitor and assist in implementation efforts for the following new standards: • Leases • Current expected credit losses (“CECL”) • Hedging • Insurance contracts • Cloud computing • More technology! The following guidance is near effective date and may impact your entity TIAA CONFIDENTIAL

11. Leases: Key differences 01 U.S. GAAP ASC 842 02 IFRS IFRS 16 03 STAT SSAP 22R • Lessee: Dual classification (finance and operating). • Lessor: Three classifications (an operating, a direct financing, or a sales-type lease). • No exemption of low-value leases but capitalization policy may be adopted. • Short-term lease: A lessee and a lessor would be permitted to make an accounting policy election, by class of underlying asset, to apply simplified requirements that would be similar to existing operating lease accounting. • Lessee: Single classification (finance). • Lessor: Two classifications (operating or a finance lease). • May elect to apply the recognition exemption for leases of ‘low-value’ assets. • Short-term lease: A lessee excludes all purchase options from this determination. • Lessee: Single classification (operating). • Lessor: Single classification (operating). • Still under assessment; expected to include guidance to clarify that only depreciable assets can be subject to sale/leaseback guidance. TIAA CONFIDENTIAL

12. CECL: Key differences 01 U.S. GAAP ASU 2016-13 02 IFRS IFRS 9 03 STAT • Scope: Loans, trade receivables, debt securities classified as HTM, loan commitments, financial guarantee contracts that are not accounted for as insurance or at fair value, and a lessor's net investment in leases. • Expected Credit Loss Model: Lifetime expected credit losses are estimates for all originated and purchased assets in scope, regardless of credit risk. • Reasonable and supportable forecasts are to be incorporated within evaluations. • Scope: All financial assets, loan commitments, and financial guarantees not measured at FV through profit and loss. • Expected Credit Loss Model: Credit loss dual-measurement model where instruments are categorized into credit stages: • 12-month expected credit losses for Stage 1 instruments where no significant increase in credit risk has occurred since origination, or • Lifetime expected credit losses for Stage 2 instruments where a significant increase in credit risk has occurred. • Expected to suggest the use of a “FV floor” for investments valued at amortized cost. • For investments valued at FV, suggests ASU guidance for recognizing credit losses through an allowance for credit losses. • The intent is to mirror the timing of recognition between GAAP and STAT so that similar investments are recognized with losses consistency between GAAP and STAT • NAIC is still evaluating its options. TIAA CONFIDENTIAL

13. Hedging: Key differences 01 U.S. GAAP ASU 2017-12 02 IFRS IFRS 9 03 STAT #2017-33 and #2018-30 • “Highly effective” threshold to qualify for hedge accounting. • Amends effectiveness testing requirements, income statement presentation and disclosures. • Permits additional risk management strategies. • Enhanced disclosure requirements. • “Highly effective” threshold does not exist. • Allows more flexibility. • Time value elections: • Include time value • Exclude currency basis; and, • Exclude all of time value. • Proposes adoption of most of ASU 2017-12, except for fair value hedges. • Industry suggested that the statutory adoption of the GAAP guidance be bifurcated into two workstreams: • Nonsubstantive changes to simply hedge accounting • Other more complex changes implemented later with the assistance from industry experts. • Adopted changes to SSAP 86 for hedge effectiveness documentation requirements. TIAA CONFIDENTIAL

14. Insurance contracts: Key differences 01 U.S. GAAP ASU 2018-12 02 IFRS IFRS 17 03 STAT • Requires updated assumptions for liability measurement. • Standardizes the liability discount rate based upon expected investment yield. • Provides more consistency in measurement of market risk benefits. • Simplifies amortization of deferred acquisition costs. • Requires enhanced disclosures. • Requires entities to identify portfolios of insurance contracts, which comprise contracts that are subject to similar risks and are managed together. • The discount rate is to reflect the characteristics of the cash flows arising from the insurance contracts. • Each portfolio of insurance contracts issued shall be divided into a minimum of three groups: • Onerous at initial recognition; • At initial recognition, have no significant possibility of becoming onerous subsequently; and • The remaining contracts in the portfolio, if any. • NAIC staff anticipate rejecting ASU 2018-12 for statutory accounting. • Principle Based Reserves. • Actuarial & Model Updates. TIAA CONFIDENTIAL

15. Cloud computing: Key differences 01 U.S. GAAP ASU 2018-15 02 IFRS IAS 38 03 STAT • Clarifies that a customer in a hosting arrangement that is a service contract would apply the guidance in ASC 350-40 to determine which costs of implementing the hosting arrangement to defer and recognize as an asset. • Expense capitalized costs over noncancellable term of hosting arrangement. • Balance sheet - capitalize in same line item as prepayment of fees related to hosting arrangement. • Income statement - expense in same line item as fees associated with hosting arrangement. • Cash flow statement - present capitalized costs in same manner as prepayments for hosting arrangement. • No current guidance that addresses cloud computing – defers to IAS 38, Intangibles. • At contract commencement date, a contract that conveys to the customer only the right to receive access to the supplier’s application software in the future is a service contract. • If the customer has the right to use software, it recognises that right-of-use as an intangible asset at the contract commencement date as a licensing arrangement. • There is no current guidance that addresses specific treatment. • Defers to ASU 2015-05. • ASU 2015-05 requires a customer to determine whether a cloud computing arrangement contains a software license: • If the arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with how the acquisition of other software licenses is accounted for under ASC 350-40; • If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. TIAA CONFIDENTIAL

16. More technology! • Standard setters will also have to consider the effects that advances in: • Data analytics • Artificial intelligence and • Block chain technology How will these technology-driven changes affect the numerous regulatory and industry environment? TIAA CONFIDENTIAL

17. Timeline for change TIAA CONFIDENTIAL

18. Near-Term effective dates – US GAAP • ASU 2017-07 Pension Cost • ASU 2017-01 Business Combinations (Topic 805), Clarifying the Definition of a Business • ASU 2016-18 Statement of Cash Flows (Topic 230), Restricted Cash • ASU 2016-16 Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory • ASU 2016-15 Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments • ASU 2016-14 Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-Profit Entities • ASU 2016-04 Liabilities — Extinguishments of Liabilities (Subtopic 405-20), Recognition of Breakage for Certain Prepaid Stored-Value Products • ASU 2016-01 Financial Instruments — Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities 2018 • ASU 2016-02 Leases (Topic 842) 2019 • ASU 2018-01 Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 • ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments • ASU 2017-06 Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force) • ASU 2017-08 Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities • ASU 2017-11 Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging (Topic 815): I. • ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities TIAA CONFIDENTIAL

19. Near-Term effective dates – IFRS • IFRS 15 Revenue from Contracts with Customers • IFRS 9 Financial Instruments • Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28) • IFRIC 23 'Uncertainty over Income Tax Treatments' • Amendment to IFRS 4 • Prepayment Features with Negative Compensation (Amendments to IFRS 9) • IFRS 2 Classification and Measurement of Share based Payment Transactions – Amendments to IFRS 2 • Plan Amendment, Curtailment or Settlement (Amendments to IAS 19) • Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts – Amendments to IFRS 4 • IFRS 16 'Leases' • Transfers of Investment Property (Amendments to IAS 40) • Effective date of 2015-2017 annual improvements cycle • IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration 2018 • AIP IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by - investment choice 2019 TIAA CONFIDENTIAL

20. Near-Term effective dates – STAT 2018 • INT 2018-03, INT 2018-01 Income Tax Reform and related Life RBC changes • SSAP Nos. 1 and 69 ASU 2016-18 - Restricted Cash • SSAP No. 69 ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments 2019 • Statement of Statutory Accounting Principles (SSAP) No. 30R—Unaffiliated Common Stock and Issue Paper No. 158—Unaffiliated Common Stock • Appendix A A-010 - 2016 Cancer Claim Cost Valuation Tables • SSAP No. 62R—Property and Casualty Reinsurance • IP No. 157 Use of Net Asset Value • SSAP No. 86 Derivatives – updated for Derivatives and Hedging effectiveness documentation requirements • SSAP No. 100 Use of Net Asset Value Instead of Fair Value • 2018-21 and 2018-22BWG Liquidity Assessments • SSAP No. 100R Fair Value • SSAP 26R, Bonds • SSAP No. 104R ASU 2017-09, Stock Compensation - Scope of Modification Accounting • SSAP No. 107 High-Cost Risk Pooling in ACA Risk Adjustment TIAA CONFIDENTIAL • SSAP No. 86 Settlement of Variation Margin • SSAP No. 97 Extension of SCA Filing Deadlines

21. Questions TIAA CONFIDENTIAL

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