The FASB and IASB published their exposure drafts in late June on the insurance contracts project. The boards have been working together for several years to develop a comprehensive, converged standard on accounting for insurance contracts that would address recognition, measurement, presentation, and disclosure. “Insurance contracts” would be broadly defined, and the proposed guidance would apply to contracts that are written as opposed to a class of entities that write them, unlike current U.S. GAAP. Thus, the guidance could have implications for entities that are not insurers, for example, banks that write financial guarantee products or certain indemnities.
Given the potential implications of the changes being considered, entities should be engaged in assessing the impact to their products, systems, and investor reporting and consider commenting on the proposals.
Key aspects of the proposals include the requirement to use a “current value” discounted cash flow measurement for the insurance contract liability. Any excess of expected premiums over expected claims and expenses would be deferred as “margin" and amortized into income over future periods. Expected losses would be recognized immediately. A modified approach would apply for short duration contracts (e.g., property/casualty contracts) meeting specified criteria, similar to today’s unearned premium approach.
At transition, companies would apply a retrospective adoption method. Comments are due October 25.