The FASB and IASB have been working together for several years to develop a standard on accounting for insurance contracts that would address recognition, measurement, presentation, and disclosure. However, in February 2014, the FASB decided to scale back the scope of its project on insurance contracts.
Key developments in accounting for insurance contracts
- The FASB and the IASB were working together to develop a comprehensive standard on accounting for insurance contracts that would address recognition, measurement, presentation, and disclosure through mid-2013. Both boards issued exposure drafts in June 2013, but in their first substantive redeliberations in 2014, the FASB largely abandoned the project. While the IASB continues to work on its first insurance standard, the FASB has been focused on making targeted improvements to U.S. GAAP in the area as part of two distinct projects, one focused on short duration contracts and a second focused on long duration contracts.
- Under the IASB’s proposal, an insurer would measure its net obligation to pay claims and benefits and its right to future premiums using an expected value discounted cash flow approach, remeasured each period (referred to as the building block approach). At inception, there would be no immediate gain recognition for the expected excess of premiums over cash outflows.
- A modified approach for certain short duration contracts that meet specified criteria (the premium allocation approach) would apply. Like the unearned premium approach used today for short duration contracts, the premium allocation approach would recognize premiums as revenue over the coverage period. However, incurred losses would be measured in a manner consistent with the building block approach, including discounting of expected cash flows. A non-discounting practical expedient would be available for claims or the portion of claims expected to be paid within twelve months of the claim occurrence date.
- The FASB recently redeliberated possible targeted improvements to the accounting for long duration contracts under existing U.S. GAAP, and voted unanimously to unlock assumptions used in determining the liability for future policy benefits for traditional long duration contracts, limited-payment contracts, and participating life contracts and the additional liability for universal life-type contracts. The effect of the updated assumptions, including those related to changes in discount rates, would be reflected entirely through net income, and would be updated annually during the fourth quarter, which would represent a significant change from existing practice.
- The FASB has substantially completed its redeliberations for short duration contracts, concluding upon disclosure-only enhancements, which include disaggregated incurred and paid claim development tables, disclosure of the number of claims and IBNR for each accident year in the development tables, and adding additional qualitative information in liability estimates.
- Although the FASB has decided to pursue targeted improvements to U.S. GAAP rather than write a new comprehensive standard, the resulting differences from existing GAAP could still be significant. In addition to updating all assumptions each period (rather than locking them in, as is done for traditional life insurance and annuity contracts), amendments may include requirements to account for all non-separated options and guarantees embedded in insurance contracts (e.g., variable annuity guarantee features) on the same measurement basis, and amortize deferred acquisition costs using a consistent methodology across all products.
What's next for accounting for insurance contracts
- The Board directed the staff to do additional research on the discount rate used to calculate the liability for future policy benefits. The Board will continue to deliberate the discount rate and other targeted improvements to accounting for long-duration contracts at a future Board meeting.