The IASB has published a targeted revised exposure draft (ED) that will fundamentally change the accounting by all entities that issue insurance contracts. The revised IASB ED will replace IFRS 4, which currently permits a wide variety of practices in accounting for insurance contracts. The IASB is seeking comments on five key areas that have changed significantly since its previous ED. In addition, the IASB is asking whether the proposal appropriately balances costs and benefits.
The FASB expects to issue its exposure draft this week.
The FASB and IASB (the boards) have been working together for several years toward the goal of developing a comprehensive standard on accounting for insurance contracts that would address recognition, measurement, presentation, and disclosure. However, the EDs will have a number of differences.
In the IASB proposal, the measurement of the insurance contract liability is based on the building blocks of discounted, probability-weighted cash flows, a risk adjustment, and a contractual service margin representing the unearned profit on the contract. Under the FASB proposal, there is no explicit risk adjustment, but instead a single margin that implicitly includes both unearned profit and compensation for risk. Under both proposals, estimates would be re-measured each reporting period.
A simplified approach aimed principally at property and casualty contracts is permitted under the IASB proposal if the result is a reasonable approximation of the building block model or if the coverage period is one year or less. The FASB proposal will instead consider the simplified approach as a separate model to be used if specified criteria are met.
Based on the views expressed during deliberations and the expected differences in the respective exposure drafts, the FASB and IASB will likely not achieve a converged standard. While the boards share the view that insurance contracts should be measured at current value, their views differ in certain key areas that could have a significant impact on the timing of earnings recognition. Differences include the IASB’s inclusion of an explicit risk adjustment, the IASB provision that changes in estimates of future coverage and services adjust the margin rather than being recorded immediately in income, and the IASB’s capitalization of acquisition costs for unsuccessful as well as successful efforts.
The standards would affect all entities that issue “insurance contracts” as broadly defined. While there are a number of exceptions, the guidance would apply to individual contracts as opposed to a particular class of entities, and could have implications for non-insurers, including, for example, banks.
The boards have not proposed an effective date; however, we anticipate that the final guidance would have an effective date no earlier than 2018. Adoption is expected to require retrospective restatement of all prior periods.
The FASB expects to issue its exposure draft this week. Both proposals have 120-day comment periods.
The boards plan to redeliberate in 2014 on a joint basis wherever possible, with a goal of issuing final guidance in late 2014 or early 2015. Roundtables with interested constituents and field testing are also planned by both the IASB and FASB.
Given the lack of existing comprehensive insurance guidance under IFRS, the ultimate outcome of the IASB project is likely to be an IFRS standard addressing all aspects of insurance contract accounting. While the FASB exposure draft will also propose an entirely new model, the FASB could ultimately decide that only certain changes to existing US GAAP insurance guidance are warranted.
We expect to issue an In brief article regarding the FASB’s proposal in the coming week, and an update to Dataline 2013-11 within the next several weeks. Over the next several months, we plan to provide more detailed webcasts and podcasts that focus on the impact the proposal is expected to have on various insurance products. These releases will supplement our overview of the proposals provided on our webcast on June 12, which is available by replay.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact the Financial Instruments team in the National Professional Services Group (1-973-236-7803).