FASB, Financial Accounting Standards Board.

Project Update

Insurance Contracts—Joint Project of the IASB and FASB

Last updated on March 11, 2013. 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
*Decisions Reached at Last Meeting
*Summary of Decisions Reached to Date
Next Steps
*Board/Other Public Meeting Dates
Due Process Documents
Background Information
Contact Information

PROJECT OBJECTIVE

The objective of this joint IASB/FASB insurance contracts project is to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance entity. Specifically, the project is intended to improve, simplify, and converge the financial reporting requirements for insurance contracts and to provide investors with decision-useful information.

*DECISIONS REACHED AT LAST MEETING (March 6, 2013)

The FASB continued its discussions of the proposed insurance contracts standard. The Board discussed (1) the treatment of changes in estimated interest crediting and accretion rates, (2) election of the fair value option, and (3) sweep issues.

Treatment of Changes in Estimated Interest Crediting and Accretion Rates

The Board affirmed its tentative decision from the November 2012 meeting that an insurer would not be required to disaggregate cash flows of a contract into those affected by returns from assets and those not affected by returns from assets when determining discount rates that reflect the characteristics of the contract’s cash flows. The discount rates for the portfolio’s cash flows should reflect the extent to which the amount of any estimated cash flows, subject to insurer discretion, are affected by asset returns.

The Board also decided the following for insurance contracts that are affected by asset returns:

Upon any change in expectations of the crediting rate used to measure the insurance contracts liability, an insurer would:
1. Reset the interest accretion rates in a manner that recognizes any changes in estimated interest crediting and related ultimate expected cash flows on a level-yield basis over the remaining life of the contracts
2. Recognize in net income the difference between the prior expected cash flows discounted at the prior interest accretion rates and the revised expected cash flows discounted at the reset interest accretion rates.
The degree to which the interest accretion rates for the portfolio is adjusted would reflect the relative value of the account balance to be credited and the extent changes in expected amount to be credited to those account balances are the result of changes in expected asset returns.
An insurer would apply the tentative decision on accumulated other comprehensive income (AOCI) for non-asset-affected cash flows. That means an insurer would present as part of AOCI the difference between the insurance contracts liability recorded on the statement of financial position (using the current discount rate) and the amount the insurance contract liability would be if it were determined at the interest accretion rates.

Election of the Fair Value Option

Guarantees and Other Contingencies

The Board decided to eliminate the fair value option election for guarantees and other contingencies accounted for in accordance with Topic 460, Guarantees, or contingencies accounted for in accordance with Topic 450, Contingencies, that will not be within the scope of the forthcoming proposed insurance contracts guidance.

The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the effective date and transition provisions for the proposed ASU, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

Rights and Obligations of Insurance Contracts and Warranties

The Board decided to eliminate the fair value option in paragraph 825-10-15-4(d) through (e) related to rights and obligations under an insurance contract and obligations under a warranty that currently are accounted for under Topic 944 or would be accounted for in accordance with the forthcoming proposed insurance contracts guidance. The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the forthcoming proposed insurance contracts guidance.

The Board decided to eliminate the fair value option in paragraph 825-10-15-4(e)) related to rights under a warranty that will be accounted for in accordance with the guidance in the proposed Update on revenue recognition. The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the guidance in the proposed Update on revenue recognition.

Written Loan Commitments

The Board decided to eliminate the fair value option election for written loan commitments in paragraph 825-10-15-4(c). Those written loan commitments are in the scope of the Proposed ASU, Recognition and Measurement of Financial Assets and Financial Liabilities. The decision to eliminate the fair value option for written loan commitments in paragraph 825-10-15-4(c) would have the same effective date and transition provisions as the Proposed ASU, Recognition and Measurement of Financial Assets and Financial Liabilities.

Firm Commitments

The Board tentatively decided to:

Eliminate the fair value option for firm commitments that would otherwise not be recognized at inception and that involve only financial instruments in paragraph 825-10-15-4(b).
Clarify that the Board’s previous decision to retain and modify the existing model for forwards and option contracts to purchase securities in the Certain Contracts on Debt and Equity Securities Subsections of Subtopic 815-10, Derivatives and Hedging—Overall, would extend to physically settled forward and purchased option contracts (with no intrinsic value at inception) to purchase or sell loans that do not meet the definition of a derivative in Topic 815.

The decisions to eliminate the fair value option for firm commitments in paragraph 825-10-15-4(b) and to extend the model described above to forward and purchased option contracts to purchase or sell loans would have the same effective date and transition provisions as the Proposed ASU, Recognition and Measurement of Financial Assets and Financial Liabilities.

Other Miscellaneous Issues

Criteria to Account for Contracts under the Premium Allocation Approach

The Board decided to remove the following criterion that, if met, would preclude an insurer from using the premium allocation approach.

"Significant judgment is required to allocate the premium to the insurer's obligation to each reporting period."

Related Party Guarantees

The Board decided to clarify the language from the prior Board decision regarding related party guarantees to the following:

"A guarantee between related parties or entities under common control when the issuer of the guarantee is also not issuing similar guarantees to third parties, unless issuance of such guarantees is the primary business purpose of the issuing entity."

Accounting for the Excess of the Insurance Liability Measurement over the Fair Value of the Insurance Contracts in a Business Combination

The Board decided to record any excess of the asset and liability balances related to insurance contracts measured in accordance with the proposed guidance above the fair value of those assets and liabilities as a loss at the acquisition date.

Whether or not to Include Expectations in the Liability for Remaining Coverage under the Premium Allocation Approach

The Board decided to clarify that for contracts reported under the premium allocation approach, an insurer would not include expectations of future changes in coverage (for example, policyholder cancellations) in the cash flows for purposes of measuring the liability for remaining coverage or the gross premium receivable.

Recognition Point for Deferred Annuity Contracts

The Board affirmed previous decisions about recognition point of insurance contracts and to include implementation guidance regarding recognition of deferred annuity contracts.

Treatment of Income Tax Payments and Receipts

The Board decided to clarify in the implementation guidance that cash flows excluded from the measurement of the liability would include income tax payment obligations of the insurer even if the insurance contract permits the insurer to charge back those amounts to policyholders. However, any tax obligations that are incurred by the policyholder and in which the insurer pays those obligations in a fiduciary capacity would be included in the present value of fulfillment cash flows along with any amounts the insurer expects to receive from the policyholder related to those tax amounts.

Next Steps

In a future meeting, the Board will discuss the costs and benefits of the tentative decisions.

*SUMMARY OF DECISIONS REACHED TO DATE

Summary of Decisions Reached to Date (As of March 6, 2013)

NEXT STEPS

The Boards are redeliberating significant issues based on feedback received on the IASB Exposure Draft and FASB Discussion Paper. Please refer to the Current Technical Plan for information about project timeline.

*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.

*March 6, 2013	Board Meeting—Treatment of changes in estimated interest crediting and accretion rates, election of the fair value option, other miscellaneous issues
February 27, 2013	Board Meeting—Presentation, Disclosure
February 20, 2013	Board Meeting—Segregated assets related to direct performance linked insurance contracts, accretion of interest on the margin
February 13, 2013	Board Meeting—Reconsideration of the measurement of investment components and the aggregate insurance contracts revenue, transition, effective date and comparative financial statements, early adoption, and comment period
February 6, 2013	Board Meeting—Accounting for guarantees, Modifications of insurance contracts, Foreign currency transactions
January 30, 2013	Joint Board Meeting—Allocation of insurance contract revenue—change in pattern of expected claims, Considering the transition proposals in the light of subsequent decisions on insurance contracts revenue
November 20, 2012	Joint Board Meeting—Discount Rate - Components of Contracts Cash Flows to Which Mirroring Does Not Apply but That Are Affected by Expected Asset Returns
November 20, 2012	Board Meeting—Scope - Guarantee Contracts
November 14, 2012	Board Meeting—Ceding Commissions, Business Combinations and Portfolio Transfers, Participation Features of Mutual Insurance Companies
October 17, 2012	Joint Board Meeting—Presentation in statement of comprehensive income comparison of methods, non-claims fulfillment costs, and acquisition costs
October 15, 2012	Joint Board Meeting—Premium allocation approach discount rate follow up, and participating contracts
October 15, 2012	Board Meeting—Re-designation of financial assets
October 3, 2012	Board Meeting—Measurement of the Aggregate Premium for the Insurance Component
September 24, 2012	Joint Board Meeting—Acquisition Costs in the Pre-coverage Period, Transition Requirements
September 5, 2012	Board Meeting—Unlocking of the Single Margin
August 1, 2012	Board Meeting—Charitable Gift Annuities
July 25, 2012	Board Meeting—Title Insurance Contracts, Advertising Costs: Direct Response Advertising
June 12, 2012	Joint Board Meeting—Earned Premiums, Unbundling: Allocation of Cash Flows
May 22-24, 2012	Joint Board Meeting—Acquisition Costs, Separation of Investment Components from the Insurance Contract, Summary of Separation Approaches, The Use of OCI
April 18, 2012	Joint Board Meeting—Reinsurance, Contract Modifications, Riders and Policy Loans
March 21, 2012	Joint Board Meeting—Unit of Account, Separation of Investment Components from the Insurance Contract
March 7, 2012	Board Meeting—Financial Instruments with Discretionary Participation Features
February 27, 2012	Joint Board Meeting—Eligibility Criteria for the Premium Allocation Approach, Mechanics for the Premium Allocation Approach, Measurement of Liabilities for Infrequent, High-Severity Events, Onerous Contracts, Unbundling Goods and Services Components, Financial Instruments with Discretionary Participation Features (IASB only)
December 15-16, 2011	Joint Board Meeting—Participating Contracts, Discounting of the Liability for Incurred Claims, Unit of Account, Onerous Contracts
November 30, 2011	Board Meeting—Accounting for Participation Features
November 16, 2011	Joint Board Meeting—Disaggregation of Explicit Account Balances
October 20, 2011	Joint Board Meeting—Fixed-Fee Service Contracts, Premium Allocation Approach, Statement of Financial Position, Statement of Comprehensive Income
September 19, 2011	Joint Board Meeting—Risk Adjustment and Disclosures
September 7, 2011	Board Meeting—Single Margin and Liability for Incurred Claims
July 21, 2011	Joint Board Meeting—Premium Allocation Approach
June 15, 2011	Joint Board Meeting—Statement of Comprehensive Income
June 13, 2011	Joint Board Meeting—Residual Margin and Acquisition Costs
May 31, 2011	Joint Board Meeting—Reinsurance
May 17-18, 2011	Joint Board Meeting—Risk Adjustment
May 11, 2011	Joint Board Meeting—Policyholder Participation
May 4, 2011	Joint Board Meeting—Unbundling
April 27, 2011	Joint Board Meeting—Modified Approach
April 12, 2011	Joint Board Meeting—Discount Rate
March 29, 2011	Joint Board Meeting—Unlocking the Margin and the Insurance Working Group Meeting
March 22, 2011	Joint Board Meeting—Risk Adjustment and Contract Boundary
March 21, 2011	Joint Board Meeting—Risk Adjustment, Discount Rate, and Unbundling
March 15, 2011	Joint Board Meeting—Risk Adjustment, Discount Rate, Initial Recognition, and Definition
March 14, 2011	Joint Board Meeting—Presentation, Composite Margin, and Discount Rate
March 2, 2011	Joint Board Meeting—Scope, Field Tests, Uncertainty, and Acquisition Costs
March 1, 2011	Joint Board Meeting—Discounting and Scope
February 18, 2011	Joint Board Meeting—Discount Rate, Cash Flows, Risk Adjustment, Recognition, Residual or Composite Margin, and Presentation
February 17, 2011	Joint Board Meeting—Project Axioms and Assumptions, and Discount Rate
February 16, 2011	Joint Board Meeting—Unbundling
February 9, 2011	Board Meeting—Changes to U.S. GAAP
February 3, 2011	Board Meeting—Discount Rate
February 2, 2011	Joint Board Meeting—Acquisition Costs
January 19, 2011	Joint Board Meeting—Discount Rate
January 18, 2011	Joint Board Meeting—Comment Letter Summaries
December 15, 2010	Joint Board Meeting—Project Review and Outreach Summary
July 28, 2010	Board Meeting—Modified Approach
July 19, 2010	Joint Board Meeting—Unbundling, Unit-Linked Contracts, Modified Approach, and Investment Contracts with Discretionary Participating Features
June 23, 2010	Joint Board Meeting—Cash flows, Acquisition Costs, Participating Contracts, Unbundling, Presentation, Residual or Composite Margin
June 15 & 16, 2010	Joint Board Meeting—Cash Flows, Foreign Currency, Risk Adjustment, Reinsurance, Acquisition Costs, Residual or Composite Margin, Participating Contracts, Insurance Risk, Embedded Derivatives, Derecognition, Portfolio Transfers
June 10, 2010	Joint Board Meeting—Participating Contracts and Risk Adjustment
June 9, 2010	Board Meeting—Modified Approach
June 1, 2010	Joint Board Meeting—Transition, Portfolio Transfers, and Business Combinations
May 19, 2010	Joint Board Meeting—Unbundling and Scope
May 18, 2010	Joint Board Meeting—Residual Margin, Risk Adjustment, Composite Margin, Unit of Account, and Disclosures
May 5, 2010	Board Meeting—Contract Boundaries
April 22, 2010	Joint Board Meeting—Discount Rate
April 14, 2010	Board Meeting—Use of Other Comprehensive Income
March 24, 2010	Joint Board Meeting—Disclosures
March 23, 2010	Joint Board Meeting—Risk Adjustment and Participating Contracts
March 22, 2010	Joint Board Meeting—Definition and Scope
March 17, 2010	Joint Board Meeting—Risk Adjustment
March 16, 2010	Joint Board Meeting—Acquisition Costs
March 15, 2010	Joint Board Meeting—Residual Margin
February 10, 2010	Joint Board Meeting—Reinsurance and Policyholder Accounting
January 27, 2010	Board Meeting—Policyholder Behavior and Deposit Floor
January 19, 2010	Joint Board Meeting—Measurement Approach, Risk Adjustment, Recognition, Residual Margin, and Policyholder Behavior
January 5, 2010	Joint Board Meeting—Unbundling, Presentation, and Embedded Derivatives
December 16, 2009	Joint Board Meeting—Measurement Approach and Risk Adjustment
November 24, 2009	Board Meeting—Recognition, Embedded Options, and Derecognition
November 18, 2009	Joint Board Meeting—Participating Contracts
October 28, 2009	Joint Board Meeting—Scope, Measurement Approach, Acquisition Costs, and Presentation
July 23, 2009	Joint Board Meeting—Fulfillment Value and Acquisition Costs
July 21, 2009	Board Meeting—Risk Adjustment, Measurement Approach, and Discounting
May 18, 2009	Board Meeting—Risk Adjustment and Acquisition Costs
April 2, 2009	Board Meeting—Cash Flows
February 25, 2009	Board Meeting—Measurement Approach for Insurance Contracts
October 29, 2008	Agenda decision announcement

DUE PROCESS DOCUMENTS

Discussion Paper, Preliminary Views on Insurance Contracts (September 17, 2010)

On September 17, 2010, the FASB issued, for public comment, a Discussion Paper, Preliminary Views on Insurance Contracts. The Discussion Paper includes a comparison of the IASB’s Exposure Draft, Insurance Contracts (issued July 30, 2010), the FASB’s preliminary views, and current U.S. generally accepted accounting principles (GAAP). The comment period for the IASB Exposure Draft ended on November 30, 2010. The comment period for the Discussion Paper ended on December 15, 2010.

Download the FASB Discussion Paper.
Read the Comment Letters on the FASB Discussion Paper
Read the press release introducing the FASB Discussion Paper.
Download the IASB Exposure Draft.
Read the Comment Letters on the IASB Exposure Draft.
Read a summary of User Outreach.

The FASB and the IASB held the following public roundtable meetings for the insurance project:

Thursday, December 9, 2010 in Tokyo, Japan
Thursday, December 16, 2010 in London, United Kingdom
Monday, December 20, 2010 in Norwalk, Connecticut, USA

Information regarding the roundtable meetings held in Tokyo and London can be found on the IASB’s roundtable meetings page. Information regarding the roundtable meetings held in Norwalk on December 20, 2010 can be found in the Online Public Reference Room.

Invitation to Comment, An FASB Agenda Proposal: Accounting for Insurance Contracts by Insurers and Policyholders, Including the IASB Discussion Paper, Preliminary Views on Insurance Contracts (August 2, 2007)

On August 2, 2007, the FASB issued an Invitation to Comment, An FASB Agenda Proposal: Accounting for Insurance Contracts by Insurers and Policyholders, Including the IASB Discussion Paper, Preliminary Views on Insurance Contracts. The IASB Discussion Paper (issued May 2007) set forth the IASB’s 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 comment period for both documents ended November 16, 2007.

Download the FASB Invitation to Comment.
Read the Comment Letters on the FASB Invitation to Comment
Download the IASB Discussion Paper.
Read the Comment Letters on the IASB Discussion Paper.

BACKGROUND INFORMATION

In 2002, the IASB decided to address accounting for insurance contracts in a two-phase project. The first phase of the project was completed in May 2004 with the issuance of International Financial Reporting Standard (IFRS) 4, Insurance Contracts, which provided temporary guidance for insurers adopting IFRSs in 2005. IFRS 4 made limited improvements to accounting practices for insurance contracts, permitted a wide variety of practices to continue, and avoided major changes that might be reversed upon completion of the second phase.

As part of the second phase of the project, in May 2007, the IASB issued a Discussion Paper, Preliminary Views on Insurance Contracts, which focused on developing a comprehensive accounting model for an insurer’s rights and obligations (insurance assets and liabilities) arising from insurance activities.

In August 2007, the Board issued an Invitation to Comment, An FASB Proposal: Accounting for Insurance Contracts by Insurers and Policyholders, which included the IASB’s Discussion Paper. The Board received 45 comment letters in response to the Invitation to Comment, which led to its decision in October 2008 to participate in the project jointly with the IASB. Since then, the Boards have held more than 20 meetings to discuss various proposals to develop a common standard for insurance contracts. Although the project on insurance contracts is a joint project, it is not part of the Boards’ Memorandum of Understanding that was issued to acknowledge their commitment to the development of high-quality, compatible accounting standards and further the convergence of U.S. GAAP and IFRSs.

The IASB published an Exposure Draft on financial reporting for insurance contracts on July 30, 2010, which, when finalized, will replace IFRS 4. In developing the IASB’s Exposure Draft, most of the discussions about the proposed insurance accounting approaches were held jointly with the FASB. While the Boards reached common decisions in many areas, they reached different conclusions in others. Some Board members prefer the IASB’s proposed approach; however, the majority prefers an alternative approach. Regardless of Board members’ individual views and uniform commitment to convergence, the Board determined that additional information was needed about whether the possible new accounting guidance would represent a sufficient improvement to U.S. GAAP to justify issuing new guidance. On September 17, 2010, the Board issued, for public comment, a Discussion Paper, Preliminary Views on Insurance Contracts.

For additional and current information concerning the IASB’s insurance contracts project visit the IASB Insurance Contracts Project page.

CONTACT INFORMATION

FASB Jennifer Weiner Senior Practice Fellow jmweiner@fasb.org
Christopher Irwin Practice Fellow cgirwin@fasb.org
Lauren Alexander Associate Practice Fellow lalexander@fasb.org
Aaron Jacob Postgraduate Technical Assistant amjacob@fasb.org
Andrea Laos Postgraduate Technical Assistant aclaos@fasb.org