(2) Accounting Changes

On January 1, 2012, we adopted new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.

Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.

More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.

We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.

On October 22, 2012, we announced the launch of a new traditional term life insurance product, along with other changes to our life insurance portfolio designed to update and expand our product offerings and further adjust pricing. We will floor the liability for future policy benefits on these level premium term insurance policies at zero, consistent with our accounting for our existing level premium term insurance business.

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Assets
Total investments	$	71,904		$	—		$	—		$	71,904
Cash and cash equivalents		4,488			—			—			4,488
Accrued investment income		691			—			—			691
Deferred acquisition costs		7,327			(2,134	)		—			5,193
Intangible assets		577			3			—			580
Goodwill		1,253			—			—			1,253
Reinsurance recoverable		16,982			—			16			16,998
Other assets		958			—			—			958
Separate account assets		10,122			—			—			10,122

Total assets	$	114,302		$	(2,131	)	$	16		$	112,187

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	31,971		$	3		$	201		$	32,175
Policyholder account balances		26,345			—			—			26,345
Liability for policy and contract claims		7,620			—			—			7,620
Unearned premiums		4,257			(34	)		—			4,223
Other liabilities		6,308			—			—			6,308
Borrowings related to securitization entities		396			—			—			396
Non-recourse funding obligations		3,256			—			—			3,256
Long-term borrowings		4,726			—			—			4,726
Deferred tax liability		1,636			(733	)		(65	)		838
Separate account liabilities		10,122			—			—			10,122

Total liabilities		96,637			(764	)		136			96,009

Stockholders’ equity:
Class A common stock		1			—			—			1
Additional paid-in capital		12,124			12			—			12,136
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		1,586			31			—			1,617
Net unrealized gains (losses) on other-than-temporarily impaired securities		(132	)		—			—			(132	)

Net unrealized investment gains (losses)		1,454			31			—			1,485

Derivatives qualifying as hedges		2,009			—			—			2,009
Foreign currency translation and other adjustments		558			(5	)		—			553

Total accumulated other comprehensive income (loss)		4,021			26			—			4,047
Retained earnings		3,095			(1,391	)		(120	)		1,584
Treasury stock, at cost		(2,700	)		—			—			(2,700	)

Total Genworth Financial, Inc.’s stockholders’ equity		16,541			(1,353	)		(120	)		15,068
Noncontrolling interests		1,124			(14	)		—			1,110

Total stockholders’ equity		17,665			(1,367	)		(120	)		16,178

Total liabilities and stockholders’ equity	$	114,302		$	(2,131	)	$	16		$	112,187

The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change		As Currently Reported
Revenues:
Premiums	$	1,461		$	—		$	—	$	1,461
Net investment income		842			—			—		842
Net investment gains (losses)		(157	)		—			—		(157	)
Insurance and investment product fees and other		375			—			—		375

Total revenues		2,521			—			—		2,521

Benefits and expenses:
Benefits and other changes in policy reserves		1,457			—			—		1,457
Interest credited		194			—			—		194
Acquisition and operating expenses, net of deferrals		510			71			—		581
Amortization of deferred acquisition costs and intangibles		190			(38	)		—		152
Interest expense		124			—			—		124

Total benefits and expenses		2,475			33			—		2,508

Income before income taxes		46			(33	)		—		13
Benefit for income taxes		(19	)		12			—		(7	)

Net income		65			(45	)		—		20
Less: net income attributable to noncontrolling interests		36			—			—		36

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	29		$	(45	)	$	—	$	(16	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic ⁽¹⁾	$	0.06		$	(0.09	)	$	—	$	(0.03	)

Diluted ⁽¹⁾	$	0.06		$	(0.09	)	$	—	$	(0.03	)

⁽¹⁾	May not total due to whole number calculation.

The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Revenues:
Premiums	$	4,353		$	—		$	—		$	4,353
Net investment income		2,553			—			—			2,553
Net investment gains (losses)		(225	)		—			—			(225	)
Insurance and investment product fees and other		1,063			—			—			1,063

Total revenues		7,744			—			—			7,744

Benefits and expenses:
Benefits and other changes in policy reserves		4,538			—			11			4,549
Interest credited		599			—			—			599
Acquisition and operating expenses, net of deferrals		1,524			201			—			1,725
Amortization of deferred acquisition costs and intangibles		572			(107	)		—			465
Interest expense		385			—			—			385

Total benefits and expenses		7,618			94			11			7,723

Income before income taxes		126			(94	)		(11	)		21
Provision for income taxes		5			7			(4	)		8

Net income		121			(101	)		(7	)		13
Less: net income attributable to noncontrolling interests		106			—			—			106

Net income (loss) available to Genworth Financial, Inc.’s common stockholders	$	15		$	(101	)	$	(7	)	$	(93	)

Net income (loss) available to Genworth Financial, Inc.’s common stockholders per common share:
Basic ⁽¹⁾	$	0.03		$	(0.21	)	$	(0.01	)	$	(0.19	)

Diluted ⁽¹⁾	$	0.03		$	(0.21	)	$	(0.01	)	$	(0.19	)

⁽¹⁾	May not total due to whole number calculation.

The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:


(Amounts in millions)	As Originally Reported			Effect of DAC Change			Effect of Reserve Change			As Currently Reported
Cash flows from operating activities:
Net income	$	121		$	(101	)	$	(7	)	$	13
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(71	)		—			—			(71	)
Net investment losses		225			—			—			225
Charges assessed to policyholders		(507	)		—			—			(507	)
Acquisition costs deferred		(686	)		201			—			(485	)
Amortization of deferred acquisition costs and intangibles		572			(107	)		—			465
Deferred income taxes		(158	)		7			(4	)		(155	)
Net increase in trading securities, held-for-sale investments and derivative instruments		795			—			—			795
Stock-based compensation expense		23			—			—			23
Change in certain assets and liabilities:
Accrued investment income and other assets		(152	)		—			—			(152	)
Insurance reserves		1,942			—			11			1,953
Current tax liabilities		8			—			—			8
Other liabilities and policy-related balances		(80	)		—			—			(80	)

Net cash from operating activities	$	2,032		$	—		$	—		$	2,032

The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy			As Computed Under Previous Policy			Effect of Change
Assets
Total investments	$	74,893		$	74,893		$	—
Cash and cash equivalents		3,741			3,741			—
Accrued investment income		746			746			—
Deferred acquisition costs		5,020			5,020			—
Intangible assets		488			488			—
Goodwill		1,128			1,128			—
Reinsurance recoverable		17,195			17,172			23
Other assets		1,010			1,010			—
Separate account assets		10,166			10,166			—

Total assets	$	114,387		$	114,364		$	23

Liabilities and stockholders’ equity
Liabilities:
Future policy benefits	$	33,221		$	32,997		$	224
Policyholder account balances		26,449			26,449			—
Liability for policy and contract claims		7,545			7,545			—
Unearned premiums		4,291			4,291			—
Other liabilities		6,073			6,073			—
Borrowings related to securitization entities		353			353			—
Non-recourse funding obligations		2,325			2,325			—
Long-term borrowings		4,880			4,880			—
Deferred tax liability		1,437			1,508			(71	)
Separate account liabilities		10,166			10,166			—

Total liabilities		96,740			96,587			153

Stockholders’ equity:
Class A common stock		1			1			—
Additional paid-in capital		12,162			12,162			—
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired		2,641			2,641			—
Net unrealized gains (losses) on other-than-temporarily impaired securities		(88	)		(88	)		—

Net unrealized investment gains (losses)		2,553			2,553			—

Derivatives qualifying as hedges		2,011			2,011			—
Foreign currency translation and other adjustments		659			659			—

Total accumulated other comprehensive income (loss)		5,223			5,223			—
Retained earnings		1,741			1,871			(130	)
Treasury stock, at cost		(2,700	)		(2,700	)		—

Total Genworth Financial, Inc.’s stockholders’ equity		16,427			16,557			(130	)
Noncontrolling interests		1,220			1,220			—

Total stockholders’ equity		17,647			17,777			(130	)

Total liabilities and stockholders’ equity	$	114,387		$	114,364		$	23

The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy		As Computed Under Previous Policy		Effect of Change
Revenues:
Premiums	$	1,311	$	1,311	$	—
Net investment income		825		825		—
Net investment gains (losses)		9		9		—
Insurance and investment product fees and other		391		391		—

Total revenues		2,536		2,536		—

Benefits and expenses:
Benefits and other changes in policy reserves		1,363		1,356		7
Interest credited		193		193		—
Acquisition and operating expenses, net of deferrals		504		504		—
Amortization of deferred acquisition costs and intangibles		162		162		—
Goodwill impairment		89		89		—
Interest expense		126		126		—

Total benefits and expenses		2,437		2,430		7

Income before income taxes		99		106		(7	)
Provision for income taxes		29		32		(3	)

Net income		70		74		(4	)
Less: net income attributable to noncontrolling interests		36		36		—

Net income available to Genworth Financial, Inc.’s common stockholders	$	34	$	38	$	(4	)

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.07	$	0.08	$	(0.01	)

Diluted	$	0.07	$	0.08	$	(0.01	)

The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy		As Computed Under Previous Policy		Effect of Change
Revenues:
Premiums	$	3,720	$	3,720	$	—
Net investment income		2,503		2,503		—
Net investment gains (losses)		10		10		—
Insurance and investment product fees and other		1,252		1,252		—

Total revenues		7,485		7,485		—

Benefits and expenses:
Benefits and other changes in policy reserves		3,977		3,961		16
Interest credited		582		582		—
Acquisition and operating expenses, net of deferrals		1,536		1,536		—
Amortization of deferred acquisition costs and intangibles		582		582		—
Goodwill impairment		89		89		—
Interest expense		352		352		—

Total benefits and expenses		7,118		7,102		16

Income before income taxes		367		383		(16	)
Provision for income taxes		108		114		(6	)

Net income		259		269		(10	)
Less: net income attributable to noncontrolling interests		102		102		—

Net income available to Genworth Financial, Inc.’s common stockholders	$	157	$	167	$	(10	)

Net income available to Genworth Financial, Inc.’s common stockholders per common share:
Basic	$	0.32	$	0.34	$	(0.02	)

Diluted	$	0.32	$	0.34	$	(0.02	)

The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:


(Amounts in millions)	As Reported Under New Policy			As Computed Under Previous Policy			Effect of Change
Cash flows from operating activities:
Net income	$	259		$	269		$	(10	)
Adjustments to reconcile net income to net cash from operating activities:
Amortization of fixed maturity discounts and premiums and limited partnerships		(59	)		(59	)		—
Net investment gains		(10	)		(10	)		—
Charges assessed to policyholders		(590	)		(590	)		—
Acquisition costs deferred		(456	)		(456	)		—
Amortization of deferred acquisition costs and intangibles		582			582			—
Goodwill impairment		89			89			—
Deferred income taxes		14			20			(6	)
Gain on sale of subsidiary		(15	)		(15	)		—
Net increase in trading securities, held-for-sale investments and derivative instruments		66			66			—
Stock-based compensation expense		20			20			—
Change in certain assets and liabilities:
Accrued investment income and other assets		(160	)		(160	)		—
Insurance reserves		1,672			1,656			16
Current tax liabilities		(190	)		(190	)		—
Other liabilities and policy-related balances		(795	)		(795	)		—

Net cash from operating activities	$	427		$	427		$	—

Accounting Pronouncements Not Yet Adopted

In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.