In an effort to improve guidance, the US Financial Accounting Standards Board (FASB) on Thursday proposed an updated standard for the financial reporting of all insurance contracts, not just those written by insurance companies, and asked stakeholders to comment on it by October 25th.
The proposal aims to bring consistency to the existing standards under US generally accepted accounting principles (GAAP), including measurement of insurance liabilities and the related effect on the statement of comprehensive income. Existing GAAP standards evolved over the years in response to the introduction of new products, which led to inconsistencies.
FASB’s proposed standard is the result of a joint insurance contracts project with the International Accounting Standards Board, which last week released a revised exposure draft of proposals meant to improve accounting for insurance contracts. The long-term goal of the joint project is to work toward a converged international standard.
“The proposed standard is intended to bring greater consistency and relevance to the accounting for contracts that transfer significant risk between parties,” FASB Chairman Leslie Seidman said in a statement.
The proposal includes significant changes. Among other things, it would:
- Require contracts that transfer significant insurance risk to be accounted for as insurance, regardless of the type of institution that issued the contract. Therefore, the proposed standard would apply to banks, guarantors, service providers and other types of insurers, in addition to insurance companies.
- Establish the principles that an insurer would apply in the recognition, measurement, presentation and disclosure of insurance contracts issued and reinsurance contracts held in its financial statements.
- Limit the number of measurement models to two. The building block approach would be applied to most life, annuity and long-term health contracts. The premium allocation approach would be applied to most property, liability and short-term health contracts, and some guarantees and service contracts.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.
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