By Frank Byrt
The International Accounting Standards Board (IASB) continues its work with the Financial Accounting Standards Board (FASB) to develop an accounting standard for insurance contracts reporting that would improve on current US Generally Accepted Accounting Principles (GAAP) and coincide with International Financial Reporting Standards (IFRS).
The objective of the project "is to develop common, high-quality guidance that will address recognition, measurement, presentation, and disclosure requirements for insurance contracts (including reinsurance), even if the contracts are not issued by an insurance entity", according to a February 1 update on the project posted on the FASB website. "Specifically, the project is intended to improve, simplify, and converge the financial reporting requirements for insurance contracts and to provide investors with decision-useful information."
Insurers currently use a variety of approaches to measure the value of insurance contracts for financial statement reporting purposes, which could make it difficult to compare companies on the same basis and determine the value of an insurance business from an investors' perspective.
At their most recent meeting January 30, FASB and IASB focused on two issues: the presentation of insurance contract revenue when there are changes in the pattern of expected claims, and transition proposals for insurance contract revenue recognition.
FASB and IASB tentatively decided that under the building-block approach, insurance contracts revenue projections should be updated and reallocated on a prospective basis if there is a change in the expected pattern of future claims in order to reflect the latest estimates of that pattern.
In a discussion regarding the transition proposals for insurance contract revenue, FASB tentatively decided that "for contracts accounted for under the building-block approach that are in force at transition, the amount of the revenue to be recognized after transition should be determined as follows:
- "For contracts for which the margin is determined through retrospective application, the insurance contact revenue remaining to be earned as of the date of transition should be determined retrospectively by using the assumptions applied in the retrospective determination of the margin.
- For contracts for which retrospective application is not practicable to determine the margin because it would require significant estimates that are not based solely on objective information, the insurance contract revenue remaining to be earned should be presumed to equal the amount of the liability for remaining coverage (excluding any investment components) recorded at the date of transition (plus accretion of interest)."
The IASB tentatively decided separately "that on transition, an insurer should estimate the amount of revenue to be recognized in future periods by estimating the residual margin or initial loss included in the liability for remaining coverage. In estimating that residual margin or loss, an insurer should assume that the risk adjustment at inception is assumed to equal the risk adjustment on transition", according to the FASB update of February 1.
"In addition, the IASB decided that when retrospective application is not practicable, an insurer should estimate the residual margin by maximizing the use of objective data. In other words, an insurer should not calibrate the residual margin to the insurance liability as it was measured using previous GAAP", the FASB posting said.