FASB dramatically changes direction on its insurance project—a relief for some, bad news for global convergence.
On February 19, the FASB decided to scale back the scope of its project on insurance contracts. This decision is important for non-insurers, as it narrows the applicability of any new guidance to insurance entities only (at least for now). For insurers, the FASB voted to narrow the scope to identifying targeted improvements to U.S. GAAP. These decisions likely signal the end of joint efforts with the IASB to issue a new, mostly converged standard on accounting for insurance contracts.
The FASB’s decisions were in large part due to feedback from U.S. investors and preparers who favored targeted improvements to existing U.S. GAAP in the event that substantial convergence with the IASB’s proposed insurance model became unlikely. One of the key unresolved differences was the IASB’s support for, and the FASB’s rejection of, an explicit risk adjustment in the proposed present value of cash flows model.
The board voted to limit the project scope to insurance entities, but left the door open to possibly include certain contracts written by non-insurers, if deemed necessary. The FASB exposure draft on the project (the “ED”) had proposed a wide scope, based on a very broad definition of insurance, making it applicable to certain contracts written by non-insurers as well as insurers. That scope would have included certain contracts issued by banks and other financial institutions, such as financial guarantees and standby letters of credit. The ED also included a long list of scope exceptions that were viewed as complex and difficult to apply. Non-insurers writing contracts such as fixed fee service agreements were concerned that their contracts might unintentionally fail the exemption criteria and be scoped into the standard.
For insurance entities, the FASB will focus on identifying targeted improvements to existing U.S. GAAP accounting for long duration insurance contracts, which principally covers life and annuity business. The board will also consider disclosure-only enhancements for short duration insurance contracts, such as property/casualty business.
Convergence likely off the table
The FASB’s decision to scale back its insurance contracts project means that the IASB will likely go it alone to finish its comprehensive standard on the topic. Some degree of convergence may still be possible as the FASB has not ruled out incorporating some of the concepts from the ED into its targeted changes. Convergence, however, is no longer a primary goal of either project.
The project’s new direction is a dramatic change from the FASB’s ED, which would have fundamentally altered insurers’ accounting and impacted a variety of non-insurers. The FASB’s decision on insurance is a further setback to achieving global convergence for insurers’ financial statements when coupled with the FASB’s significant decision regarding the direction of the financial instruments project in December.
The FASB staff will perform an analysis of existing U.S. GAAP guidance for long duration insurance contracts. The objective will be to identify potential areas for targeted improvements for the board’s consideration. The staff is also expected to develop a list of potential disclosure enhancements for short duration insurance contracts. It is unclear at this point how the timing of the project will be impacted by the revised scope.
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