FASB Agrees to Push Ahead With Insurance Contracts Despite Concerns

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By Denise Lugo

NORWALK, Conn.--Members of the Financial Accounting Standards Board voted May 23 to issue an exposure document revising the way companies would account for insurance contracts in the United States, admitting, however, that it would incur costs, complexity, and nonconvergence with the International Accounting Standards Board.

The costs and complexity incurred by the accounting provisions would be outweighed by the benefits of the proposed accounting requirements, most board members said. Two members said the lack of convergence with IASB lessens the appeal of the standard when considering such costs.

The proposal would replace existing product-specific guidance under U.S. generally accepted accounting principles (GAAP) with two models for measuring insurance contracts namely:

  • The premium allocation approach for short-term contracts such as property and casualty; and

  • The building block approach for long-term contracts such as life insurance.

Under current GAAP, multiple accounting models exist depending on the nature of the insurance contract. The new models would focus on representing the fundamental differences in the types of contracts that would apply, board discussions indicated.

Another viewpoint raised is that the proposed provisions would provide financial statement users with current information about an entity's obligation for its issued insurance contracts and reinsurance protection that it has purchased, in a more relevant and transparent manner than under existing GAAP.

Text of the board's handout on this discussion is at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162653340.

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