CLTA Sponsors Bill to Retain UTC Working Capital Calculations in Light of FASB Rule Change
Tuesday, July 16, 2019
Posted by: Heather Starkey
Assembly Bill 295 (Daly), sponsored by the CLTA, forestalls potentially very negative financial consequences to underwritten title companies (UTCs) because of new Financial Accounting Standards Board (FASB) rules which phase in between December 2018 and December 2019. Depending on their lease obligations, UTCs could face having to set aside millions of dollars in order to meet working capital requirements if the law is not changed. AB 295 expressly states that the Department of Insurance would continue to calculate underwritten title company working capital as it had prior to the FASB rule change.
Unfortunately, the new accounting rule, due to an uncontemplated impact on UTC working capital required under California statute, could create a paper deficiency in short-term working capital for UTCs with lease obligations. This would force UTCs to set additional funds as short term assets in order to maintain working capital requirements for no real economic reason in order to cure a nonexistent problem. The bill also modestly increases a UTC’s minimum working capital requirements, enacted over 45 years ago, from $10,000 to $25,000. It’s the CLTA’s understanding that this change would not adversely affect underwritten title companies.
AB 295 became necessary after the FASB changed standards on GAAP lease accounting in an attempt to increase transparency on corporate balance sheets. In a very simplified explanation of the problem, the new FASB rule requires adding operating leases as liabilities to balance sheets, while not allowing the right to use the leased property as a 100% offsetting asset.
Recognizing the statutory accounting issue for insurance companies, the National Association of Insurance Commissioners (NAIC) is in the final stages of crafting a recommendation for regulators to retain the existing standard for statutory accounting guidance for insurers.