Adopting changes to accounting or reporting guidance on the first of the new year always poses challenges. To begin with, year-end is a busy time outside of the office with holidays and staff taking time off. And, of course, year-end, when you are closing your books and finalizing financial reporting, can extend well into January and even into February for even the most efficiently run organizations. Adding anything additional into that mix is where the challenges begin.
The Principles-Based Bond Definition impacts (or potentially impacts) four key areas:
- Re-Categorization
Reporting categories for Long-Term Fixed Income investments are changing and becoming much more granular. This requires a deep understanding of the new guidance and the underlying structures of the investments to ensure investments are categorized correctly.
- New Data Points
For year-end 2025, there will be new and revised supplementary investment information for the Schedule D Part 1 schedules. These provide better optics for regulators on the nature of the investments. Some of the data points are not part of standard data feeds from industry providers.
- Reporting Changes
The new categories will go into effect for Q1 2025 reporting, and for year-end, the Schedule D Part splits into two sections for Long-Term Bonds and Asset-Backed Securities with numerous related changes. The new guidance also pushes some bonds to Schedule BA Part 1 (Other Invested Assets).
- Risk-Based Capital
Risk-Based Capital (RBC) charges are aligned around the reporting schedules, category and rating of securities. Based on the nature of the portfolio, the new guidance may cause increases to the RBC charges and should be considered for investment decisions going forward.
While the Principles-Based Bond Definition has an adoption date of January 1, 2025, all changes are not needed on Day 1. Breaking down the timeline for the transition is important to spread the effort to prepare over a longer period. Here is a way to look at the key dates to understand critical milestones for the transition based on the adoption date and first regulatory filings under the new guidance. In all cases, the assumption is to use the earliest date as the completion milestone date.
January 1, 2025
Mandatory Milestones: On January 1, 2025, there is only one absolute requirement. That requirement is identifying any assets that will move to Schedule BA and having your system updates in place to allow for the proper tagging and calculation of carry value for your interim periods during the first quarter of 2025.
Optional Milestones: This requirement only comes into play if you intend to create journal entries with a Chart of Accounts that correlates to the regulatory holding schedules (e.g., you will post ledger entries to different accounts for assets held on Schedule D Part 1 Section 1 versus Schedule D Part 1 Section 2 as part of any unique breakout). If you do not intend to expand your Chart of Accounts to this lower level and will remain with mappings at the “Schedule D” level, then you have more time to complete the full set of re-categorizations under the Principles-Based Bond Definition guidance.
Recommended Milestones: SS&C recommends that organizations have at least identified the re-categorizations on or before January 1, 2025, which allows for a pro forma comparison of year-end holdings reports between the old and the new guidance along with assessments of any changes to the RBC charges.
March 31, 2025
Mandatory Milestones: By March 31, 2025, all re-categorizations must be completed, and all reporting changes required for Q1 2025 quarterly reporting should be implemented and tested.
December 31, 2025
There are nine months between the 2025 First Quarter Filings and the 2025 Year-End Filings (on a quarter-end to quarter-end data basis). The bulk of the activity will center around testing of the Annual Reports and updating workflows for the capture and update for new data requirements for the reporting.
Mandatory Milestones: Data sources have been identified for new data requirements, systems and workflows have been updated for necessary ongoing data capture. All annual reports impacted by the Principles-Based Bond Definition have been implemented and tested.
At SS&C we are working with our clients to provide the tools necessary for a smooth transition to the Principles-Based Bond Definition. A key goal in SS&C’s planning and execution is giving our clients the ability to capture data, run key reports in parallel at 2024 year-end and help automating the re-categorization to the extent possible. For more information, read our "Planning Guide for the Principles-Based Bond Definition Transition" eBook.
