Project Updates

Insurance Contracts—Joint Project of the IASB and FASB

Last updated on August 2, 2010. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.

(Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the IASB and FASB (the Boards). It was prepared by the staff and is for the information and convenience of the Boards’ constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Project Objective
*Due Process Documents
*Decisions Reached at Last Meeting
Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meeting Dates
*Background Information
Contact Information

PROJECT OBJECTIVE

The objective of this joint IASB/FASB insurance contracts project is to develop a common, high-quality standard that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts. Specifically, this project is intended to:

1. Improve and simplify the financial reporting requirements for insurance contracts.
2. Eliminate numerous pieces of current U.S. accounting literature that add to the complexity of accounting for insurance contracts.
3. Provide investors with more decision useful information. 

*DUE PROCESS DOCUMENTS

On August 2, 2007, the FASB issued an Invitation to Comment, An FASB Proposal: Accounting for Insurance Contracts by Insurers and Policyholders. That Invitation to Comment included a Discussion Paper issued in May 2007 by the IASB, Preliminary Views on Insurance Contracts, setting forth its preliminary views on the main components of an accounting model for an issuer’s rights and obligations (assets and liabilities) under an insurance contract. The FASB issued the Invitation to Comment to gather information from its constituents to help decide whether there was a need for a comprehensive project on accounting for insurance contracts and whether the FASB should undertake such a project jointly with the IASB. The comment period for both documents ended November 16, 2007.

Use the links below to view the individual comment letters received by the FASB In response to its Invitation to Comment or a summary of those comment letters.

Insurance Contracts Comment Letters

Summary of Insurance Contracts Comment Letters 

IASB Discussion Paper Comment Letters

On July 30, 2010, the IASB issued an Exposure Draft, Insurance Contracts, which proposes significant improvements to the accounting for insurance contracts. Comments are due November 30, 2010.

*DECISIONS REACHED AT LAST MEETINGS

1. Whether some or all short-duration insurance contracts should be accounted for using a modified measurement and presentation approach, previously referred to as the unearned premium approach.
    
2. Based on its decision on the first item, how the FASB should proceed, including whether it should issue an Exposure Draft based on the tentative decisions to date or a Discussion Paper that solicits further input.

1. Unbundling
    
2. Unit-Linked Contracts
    
3. Measurement Approach for Short-Duration Contracts
    
4. Investment Contracts with a Discretionary Participating Feature

Unbundling

The IASB and FASB decided tentatively to require unbundling on the basis of the following principle:

1. An investment component reflecting an account balance that meets both of the following conditions:
   
   
   1. The account balance is credited with an explicit return (i.e., it is not an implicit account balance, for example derived by discounting an explicit maturity value at a rate not explicitly stated in the contract)
       
   2. The crediting rate for the account balance is based on the investment performance of the underlying investments, namely a specified pool of investments for unit-linked contracts, a notional pool of investments for index-linked contracts or a general account pool of investments for universal life. That crediting rate must pass on to the individual policyholder all investment performance, net of contract fees and assessments.
       
2. An embedded derivative that is separated from its host contract in accordance with existing bifurcation guidance.
    
3. Contractual terms relating to goods and services that are not closely related to the insurance coverage but have been combined in a contract with that coverage for reasons other than economic.

1. The insurer’s own shares
    
2. Owner-occupied real estate, owned by the fund and occupied by the insurer.

1. Should measure this asset at fair value
    
2. Recognize changes in that fair value through profit or loss to the extent those changes relate to the interest of unit-linked contract holders in the pool of assets
    
3. Recognize in other comprehensive income those changes in fair value attributable to the insurer’s own interest in the pool of assets.

1. Assets and liabilities associated with unit-linked contracts as single line items in the statement of financial position and not commingle them with the insurer’s assets
    
2. Income and expense arising from the pool of assets underlying unit-linked contracts as a single line item and not commingle them with income and expense arising from the insurer’s other assets.

Measurement Approach for Short-Duration Contracts

The Boards discussed remaining issues relating to the measurement model for short-duration contracts (premium allocation model).

The IASB affirmed its previous decision to require, rather than merely permit, the application of the premium allocation model for the pre-claims liability of short-duration contracts and decided tentatively to apply it to short-duration contracts incorporating both of the following features:

1. The coverage period is approximately 12 months or less.
    
2. The contracts do not contain embedded options or guarantees that are not separated under the bifurcation requirements and also have a significant impact on the variability of cash flows during the coverage period.

The IASB discussed whether to include the following third condition and decided not to include it: the insurer is unlikely to become aware of events during the coverage period that could cause significant decreases in the expected cash outflows.

Regarding the treatment of acquisition costs under the premium allocation model, the IASB decided tentatively:

1. To defer incurred incremental acquisition costs associated with insurance contracts that are measured and presented using that model
    
2. To present those deferred acquisition costs as a deduction from the unallocated premium liability.

The IASB also decided tentatively:

1. That an insurer should accrete interest on the contract position (expected present value of remaining premiums less unallocated premium obligation). The IASB noted that such interest might often be immaterial.
    
2. To use a current rate to accrete interest to an unallocated premium liability.

The FASB will continue its deliberations on the premium allocation model during its meeting on July 28.

Investment Contracts with a Discretionary Participating Feature

The IASB discussed the treatment of the residual margin associated with the measurement of an investment contract containing a discretionary participating feature. The IASB tentatively decided that an insurer should recognize that residual margin in profit or loss over the life of the contract in a systematic way that best reflects the asset management services, as follows:

1. On the basis of passage of time, but
    
2. If the insurer expects to provide asset management services in a pattern that differs significantly from passage of time, it shall release the residual margin on the basis of the fair value of assets under management.

Next Steps

The IASB expects to publish an Exposure Draft, Insurance Contracts, at the end of July.

SUMMARY OF DECISIONS REACHED TO DATE (as of February 10, 2010)

*NEXT STEPS

The Board decided to issue a Discussion Paper to further solicit input from constituents. That Discussion Paper will compare the IASB’s proposed model, the FASB’s tentative decisions reached to date, and current U.S. GAAP. It also would include preliminary views on possible improvements to current guidance. Please refer to the Current Technical Plan for information about the expected release date of the discussion paper.

*BOARD/OTHER PUBLIC MEETING DATES

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.

*BACKGROUND INFORMATION 

CONTACT INFORMATION