NEWS RELEASE 06/27/13
FASB PROPOSES IMPROVEMENTS TO ACCOUNTING FOR INSURANCE CONTRACTS
Norwalk, CT, June 27, 2013—The Financial Accounting Standards
Board (FASB) today issued for public comment a proposal
to improve financial reporting of insurance contracts, including measurement of
insurance liabilities and the related effect on the statement of comprehensive
income. Proposed Accounting Standards Update, Insurance Contracts (Topic
834), would apply to all contracts that meet the definition of an insurance
contract, not just those written by insurance companies. Stakeholders are asked
to review and provide comment on the proposal by October 25, 2013.
existing U.S. generally accepted accounting principles (GAAP) are comprehensive,
U.S. GAAP has incrementally evolved over decades, resulting in more than one
model, some of which are inconsistent with other more recently issued guidance.
International Financial Reporting Standards (IFRS) do not have a comprehensive
standard relating to insurance contracts. These considerations, as well as
overwhelming support from stakeholders, convinced the FASB to work with the
International Accounting Standards Board (IASB) on a joint insurance contracts
project, not only to improve existing U.S. GAAP, but also to work towards a
converged international standard.
"The proposed standard is intended to
bring greater consistency and relevance to the accounting for contracts that
transfer significant risk between parties," stated FASB Chairman Leslie F.
Seidman. "Current U.S. standards on insurance have evolved over the years as
new products have been introduced, leading to some inconsistencies in GAAP. The
proposed standard would require a current measure of insurance contracts,
including the use of updated assumptions and discounting. The proposal would
provide decision-useful information about earnings, financial position and the
drivers of performance for companies entering into these contracts."
One of the most significant changes is that the guidance in the proposed Update
would require contracts that transfer significant insurance risk to be accounted
for in a similar manner, regardless of the type of institution issuing the
contract. In other words, the contractual features of the contract―not the type
of insurer―would determine whether it is insurance. Consequently, the proposed
standard would apply to banks, guarantors, service providers and other types of
insurers, in addition to insurance companies.
The proposed accounting
standard also would establish the principles that an insurer would apply in the
recognition, measurement, presentation, and disclosure of insurance contracts
issued and reinsurance contracts held in its financial statements. It would
increase the decision usefulness of the information about insurance liabilities,
including the nature, amount, timing, and uncertainty of cash flows related to
those liabilities, and the related effect on the statement of comprehensive
Under the proposal, an insurer would apply one of two measurement
models based on the characteristics of the contract. The building block approach
would be applied to most life, annuity, and long-term health contracts, while
the premium allocation approach would be applied to most property, liability,
and short-term health contracts, as well as some guarantees and service
Insurance contracts accounted for using the building block
approach would be measured each reporting period based on the current present
value of the fulfillment cash flows (the net of the expected cash inflows and
cash outflows) based on the unbiased probability weighted estimate (expected
value) that incorporates all relevant information and considers all features of
the contract, including guarantees and options. The measurement would also
include a margin that initially reflects the expected profitability of the
Insurance contracts accounted for using the premium allocation
approach would include a liability for remaining coverage that represents the
premium written (gross cash inflows) that is not yet earned and is released in
subsequent periods on the basis of the expected timing of incurred claims and
benefits. A separate liability would be recorded when the claim is incurred and
be measured based on the expected value of the present value of future cash
flows to settle the claims and related expenses.
approaches, changes in an insurer´s estimate of expected cash flows would be
recorded to net income, except for the effect on the expected cash flows as a
result of changes in the discount rates which would be recorded to other
comprehensive income. Under both approaches, an insurer would recognize revenue
in net income in proportion to the value of coverage or services provided.
Claims and contract related expenses would be recognized when incurred. Any
amounts received that are expected to be returned to the policyholder or the
policyholder´s beneficiary regardless of whether an insured event occurs would
be excluded from revenue and expenses.
The FASB proposal was developed
as part of its broader joint project with the IASB. The IASB issued its
Exposure Draft on June 20, 2013. Both proposals contain similar
fundamentals―most notably the use of current estimates―but differences exist. A
comparison of the proposals is contained in the FASB´s proposed Update.
Russ Golden, incoming chairman of the FASB, noted, "The FASB will be monitoring
comments received on both the IASB and the FASB Insurance Contracts proposals in
order to identify ways to converge financial reporting standards in this
critical area. We look forward to collaborating with the IASB as we deliberate
input provided by stakeholders across the globe."
Update includes instructions on how to submit written comments by October
25, 2013, and is available at http://www.fasb.org/. Two FASB In Focus
documents—one that provides a general
overview of the proposal, and one that focuses on the types
of companies and contracts that would be affected by it—and a video podcast
also are available at the FASB website.