IASB Aims to Finish Talks on Insurance Contracts Standard

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By David R. Jones

Jan. 15 — The International Accounting Standards Board plans to wrap up deliberations next week on technical matters for its project on insurance contracts, IASB staff report.

Discussions on the project, slated for IASB's Jan. 19 meeting in London, will include aggregation in recognizing losses on so-called onerous contracts.

Aggregating Onerous Contracts

Board members will be asked to consider whether—and if so at what level—onerous insurance contracts can be aggregated, as well as the contractual service margin (CSM) for these contracts.

The CSM is the difference between the present value of net payments to a policyholder and the premium received and receivable.

Under IASB's general model for insurance contracts, the CSM is adjusted for differences between current and previous estimates of fulfillment cash flows from future services.

Preparing for Balloting

IASB also will consider how to determine the effect of discretion that is recognized in the CSM under particular circumstances.

Once the board reaches decisions on these two topics, “the staff believe that the proposals for accounting for insurance contracts will be sufficiently developed to begin the balloting process,” a paper drafted for the meeting said.

Further, staff members believe IASB will have met all its due process requirements for the project to date.

Need for Aggregation

Companies issuing insurance policies might need to consider aggregation for contracts because gains sometimes are treated differently from losses in accounting for insurance contracts, a staff paper noted, which can create accounting mismatches if contracts are accounted for one by one.

“If the accounting model for insurance contracts always recognised gains and losses in the same way, any economic offsetting between gains and losses on different contracts would be automatically captured by the accounting,” according to the staff paper.

Differences in treating gains and losses can emerge as well in allocating the CSM.

Recommendations on Aggregation

IASB staff will recommend that entities recognize a loss for onerous contracts “only when the contractual service margin is negative for a group of contracts, and that the group should comprise contracts that at inception” meet certain conditions.

Entities could recognize the remaining CSM in profit or loss over a contract's remaining coverage period by grouping contracts with particular provisions, such as those that at inception had similar expected profitability.

Determining Aggregation Level

“There should be no exception to the level of aggregation for determining onerous contracts or the allocation of the contractual service margin when regulation affects the pricing of contracts,” a staff paper said.

Determining the appropriate level of aggregation, though, differs depending on particular circumstances, staff acknowledged.

Staff members highlighted the need for entities to strike a balance in aggregation between losing information about individual contracts and accurately depicting the impacts of grouping contracts.

Effects of Discretion

In addition, IASB members will be asked to assess whether to determine discretion effects, and if so how to specify them, in insurance contracts with participating contracts.

These contracts cause the cash flows to a policyholder to vary with returns on assets.

Staff members will request that IASB select between two alternatives the staff crafted following a contentious board meeting on the issue in November 2015.

Determining Discretion Impact

Under one approach, entities would be directed to specify the effect of discretion.

“Such an approach would require an entity to specify at the inception of the contract how it viewed its discretion under the contract, and to use that specification to distinguish between the effect of changes in market variables and changes in discretion,” according to a staff paper.

Alternately, entities would have to determine the effect of discretion by referring to market variables.

Seeking Permission to Ballot

Staff members anticipate asking IASB at its February meeting to confirm that all due-process steps for the insurance contracts project have been taken and to give staff the green light to start the balloting process for the standard.

The new standard would replace International Financial Reporting Standard 4: Insurance Contracts, issued in 2004, which the board said has produced wide diversity in the insurance industry's accounting practices over time.

IASB doesn't expect to issue the new standard before the end of the year, board chairman Hans Hoogervorst told Bloomberg BNA in December 2015.

Due Process Committee

The Due Process Oversight Committee (DPOC) of the IFRS Foundation, IASB's supervisory organization, also intends to discuss the insurance contracts project at the committee's January meeting in London.

DPOC oversees the IASB's due process procedures and those of the board's Interpretations Committee.

Details on the committee's planned discussion on the project have yet to be released.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Laura Tieger Salisbury at lsalisbury@bna.com

Staff papers on insurance contracts drafted for the meeting are available at http://www.ifrs.org/Meetings/Pages/IASB-Meeting-January-2016.aspx