THG 2018 Annual Report

impairment test by comparing the fair value of the reporting unit with its carrying amount, including any applicable income tax effects, DQG UHFRJQL]H DQ LPSDLUPHQW IRU WKH DPRXQW E\ ZKLFK WKH FDUU\LQJ DPRXQW H[FHHGV WKH UHSRUWLQJ XQLW¶V IDLU YDOXH +RZHYHU WKH loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The updated guidance is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASC Update No. 2017-04 to have a material impact on its financial position or results of operations. In June 2016, the FASB issued ASC Update No. 2016-13, (Topic 326) Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments . This ASC update introduces new guidance for the accounting for credit losses on financial instruments within its scope. A new model, referred to as the current expected credit losses model, requires an entity to determine credit-related impairment losses for financial instruments held at amortized cost and to estimate these expected credit losses over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider both historical and current information, reasonable and supportable forecasts, as well as estimates of prepayments. The estimated credit losses and subsequent adjustment to such loss estimates will be recorded through an allowance account which is deducted from the amortized cost of the financial instrument, with the offset recorded in current earnings. ASC No. 2016-13 also modifies the impairment model for available-for-sale debt securities. The new model will require an estimate of expected credit losses only when the fair value is below the amortized cost of the asset, thus the length of time the fair value of an available-for-sale debt security has been below the amortized cost will no longer affect the determination of whether a credit loss exists. In addition, credit losses on available-for-sale debt securities will be limited to the difference between the VHFXULW\¶V DPRUWL]HG FRVW EDVLV DQG LWV IDLU YDOXH In November 2018, the FASB issued ASC Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments–Credit Losses , which explicitly states that receivables arising from operating leases are not within the scope of Subtopic 326-20. ASC Update No. 2016-13 and related guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for periods beginning after December 15, 2018. The Company expects to adopt ASC Update No. 2016-13 on January 1, 2020 and is evaluating the impact on its financial position and results of operations, which it does not expect to be material. In February 2016, the FASB issued ASC Update No. 2016-02, (Topic 842) Leases . This ASC update requires a lessee to recognize a right-of- XVH DVVHW ZKLFK UHSUHVHQWV WKH OHVVHH¶V ULJKW WR XVH D VSHFLILHG DVVHW IRU WKH OHDVH WHUP DQG D FRUUHVSRQGLQJ OHDVH OLDELOL ty, which UHSUHVHQWV D OHVVHH¶V REOLJDWLRQ WR PDNH OHDVH SD\PHQWV DULVLQJ IURP D OHDVH PHDVXUHG RQ D GLVFRXQWHG EDVLV IRU DOO OH ases that extend beyond 12 months. For finance or capital leases, interest on the lease liability will be recognized separately from amortization of the right-of-use asset in the statements of income and comprehensive income. In addition, the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows. For operating leases, the asset and liability will be amortized as a single lease cost, such that the cost of the lease is allocated over the lease term, on a generally straight-line basis, with all cash flows included within operating activities in the statement of cash flows. ASC Update No. 2016-02 requires that implementation of this guidance be through a modified retrospective transition approach. In July 2018, the FASB issued ASC Update No. 2018-11, (Topic 842) Leases Targeted Improvements , which provides entities with an additional transition method to adopt ASC Update No. 2016-02. Under this optional transition method, an entity can initially apply the new guidance at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company will implement this guidance effective January 1, 2019 using the optional transition method provided in ASC Update No. 2018-11 and will elect to utilize the practical expedient package available in ASC Update 2016-02. The effect of implementing this guidance is expected to increase total assets and liabilities each by approximately $35 million on January 1, 2019, which i V QRW PDWHULDO WR WKH &RPSDQ\¶V ILQDQFLDO SRVLWLRQ Furthermore, implementation of this guidance is not expected to have a material impact on WKH &RPSDQ\¶V UHVXOWV RI RSHUDWLRQV Q. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current year presentation. 2. Discontinued Operations Gain on Sale of Chaucer Business On December 28, 2018, the Company completed the sale of Chaucer Holdings Limited to China Re. Total cash proceeds payable by China Re for this portion of the transaction is expected to total approximately $793.7 million (1) and is subject to adjustment based upon 2018 accident year catastrophe losses in excess of 10% of 2018 net earned premium. The pre-tax gain on the sale is estimated to be $174.4 million. THG paid customary transaction costs along with providing certain representations and warranties and agreeing to indemnify China Re for certain pre-sale contingent liabilities. The following table summarizes the components of the estimated gain related to the sale of the Chaucer business as of December 28, 2018. This gain below excludes an expected gain on the Irish and Australian entities associated with the Chaucer business. The Company subsequently completed the sale of its Chaucer-related Irish entity on February 14, 2019. The sale of the Australian entities is pending, subject only to local regulatory approval, and is expected to close in the first quarter of 2019. The Company received $28 million of 87 2018 ANNUAL REPORT | THE HANOVER INSURANCE GROUP