Mercury Insurance 2008 Annual Report Download - page 72

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Recently Issued Accounting Standards
Effective January 1, 2008, the Company adopted SFAS No. 157 for financial assets and liabilities. In December 2007,
the FASB provided a one-year deferral of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis, at least annually. SFAS No. 157 redefines fair values as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value
measurements. Specifically, SFAS No. 157 establishes a three-level hierarchy for fair value measurements based upon the nature
of the inputs to the valuation of an asset or liability. SFAS No. 157 applies where other accounting pronouncements require or
permit fair value measurements. In October 2008, the FASB issued FASB Staff Position No. 157-3 “Determining the Fair Value
of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), which clarifies the application of SFAS
No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. Such considerations include inputs to broker quotes,
assumptions regarding future cash flows and use of risk-adjusted discount rates. The adoption of FSP FAS No. 157-3 did not
have a material impact on the Company’ s consolidated financial statements.
As discussed above, effective January 1, 2008, the Company adopted SFAS No. 159, which establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different measurement alternatives for
similar types of financial assets and liabilities. The standard also requires additional information to aid financial statement users’
understanding of the impacts of a reporting entity’ s decision to use fair value on its earnings and requires entities to display, on the
face of the statement of financial position, the fair value of those assets and liabilities which the reporting entity has chosen to
measure at fair value. The Company elected to apply the fair value option of SFAS No. 159 to all short-term investments and all
available-for-sale fixed maturity and equity securities existing at the time of adoption and similar securities acquired subsequently
unless otherwise noted at the time when the eligible item is first recognized, including hybrid financial instruments with
embedded derivatives that would otherwise need to be bifurcated. The primary reasons for electing the fair value option were
simplification and cost-benefit considerations as well as expansion of use of fair value measurement consistent with the long-term
measurement objectives of the FASB for accounting for financial instruments.
The transition adjustment to beginning retained earnings related to the adoption of SFAS No. 159 was a gain of $80.5
million, net of deferred taxes of $43.3 million, all of which related to applying the fair value option to fixed maturity and equity
securities available for sale. This adjustment was reflected as a reclassification of accumulated other comprehensive income to
retained earnings. Both the fair value and carrying value of such securities were $3.3 billion on January 1, 2008, immediately
prior to the adoption of the fair value option.
Effective January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), “Business Combinations” ("SFAS No.
141(R)"). While SFAS No. 141(R) retains the fundamental requirements in SFAS No. 141, “Business Combinations” (“SFAS
No. 141”), that the acquisition method (referred to as the purchase method in SFAS No. 141) be used for all business
combinations and for an acquirer to be identified for each business combination, SFAS No. 141(R) significantly changes the
accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, and
acquisition costs. SFAS No. 141(R) requires an acquirer to recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. This replaces the cost-
allocation process, which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities
assumed based on their estimated fair values. Additionally, SFAS No. 141(R) requires costs incurred to effect the acquisition to
be recognized separately from the acquisition rather than included in the cost allocated to the assets acquired and liabilities
assumed. SFAS No. 141(R) requires the acquirer to recognize goodwill as of the acquisition date, measured as a residual, which
in most types of business combinations will result in measuring goodwill as the excess of the consideration transferred plus the
fair value of any noncontrolling interest in the acquiree at the acquisition date over the fair values of the identifiable net assets
acquired. In addition, under SFAS No. 141(R), changes in deferred tax asset valuation allowances and acquired income tax
uncertainties in a business combination after the measurement period impact income tax expense.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an
amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends SFAS No. 133 by requiring expanded
disclosures about an entity’ s derivative instruments and hedging activities, but does not change the scope of accounting of SFAS
No. 133. SFAS No. 161 requires increased qualitative disclosures such as how and why an entity is using a derivative instrument;
how the entity is accounting for its derivative instrument and hedged items under SFAS No. 133 and its related interpretations;
and how the instrument affects the entity’ s financial position, financial performance, and cash flows. Quantitative disclosures
should include information about the fair value of the derivative instruments, including gains and losses, and should contain more
detailed information about the location of the derivative instrument in the entity’ s financial statements. Credit-risk disclosures
should include information about the existence and nature of credit-risk-related contingent features included in derivative
instruments. Credit-risk-related contingent features can be defined as those that require entities, upon the occurrence of a credit
event such as a credit rating downgrade, to settle derivative instruments or post collateral. The Company adopted SFAS No. 161
on January 1, 2009. The adoption of SFAS No. 161 is not expected to have a material impact on the Company’ s consolidated
financial statements.