Insurance

WHY DO WE NEED A NEW STANDARD ON INSURANCE?

The FASB, along with the International Accounting Standards Board (IASB) began working on a joint insurance project in the fourth quarter of 2008. The Boards undertook the insurance contracts project 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 company.

On June 27, 2013, the FASB issued its proposed Accounting Standards Update, Insurance Contracts (Topic 834). The IASB issued its proposal on June 20, 2013. Comments on both proposals are requested by October 25, 2013.

The FASB contemplated whether insurance contracts should be included in the scope of the proposed Accounting Standards Update, Revenue Recognition (Topic 605): Revenue from Contracts with Customers. The FASB noted that the proposed revenue recognition guidance might provide decision-useful information for some insurance contracts but not for all of them. Therefore, the FASB decided to address accounting for insurance contracts in a separate project.

Specifically, the project is intended to improve, simplify, and enhance convergence of the financial reporting requirements for insurance contracts and to provide investors with decision-useful information.

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HOW COULD THE NEW STANDARD CHANGE CURRENT U.S. GAAP?

Under existing requirements within U.S. Generally Accepted Accounting Principles (U.S. GAAP), the scope of U.S. accounting guidance is based on whether an organization providing insurance is an insurance company. U.S. GAAP has evolved as a result of new insurance products, terms, and features.

Topic 944, Financial Services-Insurance requires application of different models depending on the nature of the insurance contract—one for short-duration insurance contracts (that is, for most property and liability contracts) and others for long-duration insurance contracts (that is, most life and annuity contracts).Topic 944 has not been subject to comprehensive reconsideration by the FASB before this project.

Some of the more common elements of U.S. GAAP that some stakeholders note could be improved are:
  • Insurance organization orientation
  • Definition of an insurance contract
  • Deferral of acquisition costs
  • Assumptions for traditional long-duration contracts
  • Discount rate for traditional long-duration contracts
  • Lack of discounting of liabilities for short duration contracts
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WHAT ABOUT INTERNATIONAL ACCOUNTING STANDARDS FOR INSURANCE CONTRACTS?

In contrast to U.S. GAAP, IFRSs do not contain comprehensive guidance on accounting for insurance contracts. The lack of uniform international accounting standards results in inconsistent accounting practices.

Consequently, users of financial statements of international insurers have indicated that accounting for insurance contracts is difficult to understand and does not provide sufficient decision-useful information about an insurer’s financial position and financial performance.

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CORE PRINCIPLES

The FASB has been working with the IASB on a joint insurance project since the fourth quarter of 2008. On July 30, 2010, the IASB issued its Exposure Draft, which, when finalized, will replace, International Financial Reporting Standard (IFRS) 4, Insurance Contracts.

The FASB, however, decided to issue a Discussion Paper instead of an Exposure Draft of a proposed Accounting Standards Update for the following reasons:
  • The extent of the FASB’s and the IASB’s current accounting guidance for insurance contracts vary significantly.
    • Existing U.S. generally accepted accounting principles (GAAP) comprehensively address accounting for insurance contracts by insurance organizations, whereas IFRSs do not have comprehensive guidance.
    • Whether or not the proposed approaches would improve current guidance is relative to significantly different starting points in U.S. GAAP and IFRSs.
  • Since the board was proposing comprehensive change, it thought beginning with a discussion paper would enable it to obtain more input from stakeholders that it could consider for an exposure draft.
    • Current U.S. GAAP has separate models for long- and short duration contracts with derivations within the long-duration model based on policy type.
    • The FASB wanted additional input from stakeholders on whether different types of insurance contracts warrant different recognition, measurement, and presentation and, if so, what the criteria should be for determining which, if any, types of insurance contracts would use each model.
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WHAT DOCUMENTS HAVE THE BOARDS ISSUED TO DATE?

On Thursday, July 27, the FASB issued its proposed Accounting Standards Update, Insurance Contracts (Topic 834), which would apply to all contracts that meet the definition of an insurance contract, not just those written by insurance companies. Stakeholders are encouraged to review and provide comment on the proposal by October 25, 2013.

The IASB issued its proposal to improve financial reporting of insurance contracts on June 20, 2013, with a comment deadline of October 25, 2013.




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WHERE ARE WE IN THE PROCESS NOW?

The FASB issued its proposed Accounting Standards Update, Insurance Contracts (Topic 834), on June 27, 2013. The IASB issued its Insurance Contracts proposal on June 20, 2013. The comment period for both documents concludes on October 25, 2013.

At the conclusion of the comment period, the FASB will redeliberate feedback received on both the FASB and the IASB proposals. It also will conduct outreach with stakeholders to obtain additional input on the proposed guidance. Depending on outcome of these activities, a final FASB standard could be issued as early as 2014.

Registration is now open for two live webcasts hosted by the Financial Accounting Standards Board (FASB).
(Please note that CPE credit is not available for group viewing of the live broadcasts.)

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