The FASB decided at its February 6 meeting that certain guarantees issued by non-insurers, including certain financial guarantees issued by banks and other financial institutions, should be included in the scope of the proposed insurance contracts standard.
The FASB's tentative decision will be exposed for comment as part of its insurance contracts exposure draft. The exposure draft is expected by the end of the second quarter of 2013.
The FASB and IASB (the “boards”) are jointly deliberating a project on accounting for insurance contracts. In this project, the boards have defined the term “insurance contract” broadly. The proposed insurance contracts standard is applicable to any entity that issues an insurance contract, whether or not it is a licensed insurance entity. As a result, many guarantee contracts, both financial and non-financial, could meet the definition of an “insurance contract” and be included in the scope of the standard unless the boards choose to make specific exclusions. The boards have already discussed certain exclusions, such as product warranties and service contracts.
In November, the FASB decided that the proposed insurance contracts standard will apply to guarantee contracts currently within the scope of insurance guidance, such as mortgage insurance and financial guarantee insurance contracts. The FASB decided the standard will not apply to guarantee contracts currently accounted for as derivatives.
Latest decision on non-insurer guarantees
At its February 6 meeting, the FASB concluded its discussion on guarantees, deciding that guarantees currently accounted for under general U.S. GAAP guarantee guidance (ASC 460-10, Guarantees, formerly FIN 45) and loss contingencies guidance will be in the scope of the proposed insurance contracts standard. However, certain scope exceptions will apply, including the scope exceptions included in the current guarantee guidance in ASC 460-10. For example, guarantees of a company’s own performance and guarantees that are specifically addressed by other accounting guidance, such as leasing guidance, will not be in the scope of the proposed insurance standard.
An exception will also be provided for guarantees that are both (a) unusual or non-recurring and (b) unrelated to the type of risk that is the subject of other guarantees issued by the entity. For example, a seller’s indemnification relating to a non-recurring transaction such as the sale of a business or an asset will be considered a “one-off” transaction excluded from the scope.
Guarantees between related parties or entities under common control will be exempt from the proposed insurance contracts standard if they are typically transacted only with those parties and the entity has no similar guarantee transactions issued to third parties. However, the standard will be applicable to intercompany guarantees issued by entities that also issue guarantees to third parties.
Differences exist between the tentative conclusions reached by the FASB and IASB on several key issues in this project, including guarantees. With regard to financial guarantees, the IASB has tentatively decided to permit writers of such contracts to continue to account for them as insurance if they had previously done so, and otherwise to account for them as financial instruments.
All entities that regularly issue guarantees to third parties could be affected by this tentative conclusion. Most notably affected will be banks and other financial institutions that issue guarantees currently accounted for under ASC 460-10 (formerly FIN 45).
We anticipate the final insurance contracts standard will have an effective date no earlier than 2017 or 2018.
The boards are expected to finalize their deliberations in the first quarter of 2013, with an aim of issuing exposure drafts by the end of the second quarter of 2013.
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