The Board discussed whether investment/ financial and service components contained in a contract together with insurance should be recognised and measured separately as if they were separate contracts. In particular, the Boards discussed the proposed unbundling principle:
A component of an insurance contract should be unbundled if it functions independently from other components of that contract. A component functions independently if it is not significantly interdependent with other components of that contract.
The Boards continued to be unhappy about whether the distinction between 'independent' and 'interdependent' could be made operational. Several Board members were deeply troubled about the implications for embedded derivatives and the potential for accounting arbitrage between insurance contracts and financial instruments. Ultimately, the Boards could not conclude on this issue and decided to discuss other aspects of unbundling hopeful that those discussions would assist them to articulate the unbundling principle in a coherent manner.
The Boards discussed how it might require unbundling of an investment component, especially in a long-duration insurance contract. The Boards agreed that contracts with an explicit policyholder account balance ('account-driven contracts') should be unbundled. In addition, contracts such as participating and nonguaranteed-premium contracts that have characteristics significant to account-driven contracts should be included with account-driven contracts.
The Boards agreed that the staff should build on existing US guidance (ASC Topic 944-20-15-29) to address account-driven contracts. The Boards agreed that the investment component of insurance contracts that have no characteristics significant to account-driven contracts would usually not be separated. Such contracts have no explicit account balance, nor do they share the fundamental characteristics of account-driven contracts. However, if such contracts were to include two or more components for reasons other than economic, those components would be unbundled because they function independently.
The treatment of embedded derivatives was less conclusive. The IASB voted narrowly in favour (9 in favour; 5 opposed) that embedded derivatives should be unbundled using the existing IFRS bifurcation requirements. On the other hand, the FASB were unanimous that any component, including embedded derivatives, should be unbundled if that component is not significantly interdependent with other components of the insurance contract.
The staff will take this bundle of decisions and work with the Board off-line to try to get to a common position, including trying to identify an 'unbundling principle.' That position would be deliberated in public in the ordinary manner. It was noted that the FASB's Derivatives Implementation Group had addressed a number of issues that focussed on general insurance contracts, but not long-term contracts.
Scope: Financial guarantees
The Board discussed whether financial guarantee contracts should be included in the scope of insurance contracts or in the scope of the financial instruments project. In particular, they discussed financial guarantee insurance contracts (for non-payment of interest and principal on debt instruments); mortgage guarantee insurance contracts; and credit insurance contracts (for trade receivables).
At least one Board member was concerned that many of the contracts under discussion would be derivatives but, because they met the definition of an insurance contract, would be accounted for at other than fair value. The staff tried to reassure the Board that this would not be the case, since the treatment was not dependent on holding the underlying.
The Boards ultimately agreed (FASB: 4 in favour; IASB: 13 in favour) that contracts that meet the definition of insurance should be accounted for as insurance contracts. The Boards agreed that the intent of the project was that like or similar transactions should be accounted for similarly. That objective leaves little alternative other than to account for financial guarantees that indemnify the holder as insurance contracts.
Scope: Fixed-fee service contracts
After a short discussion, the Boards did not agree that fixed-fee service contracts that meet the definition of an insurance contract should be within the scope of the IFRS/ ASC on insurance (FASB: 5 opposed; IASB: 4 in favour). Consequently, such contracts will be excluded from the Standard. This is consistent with the treatment of such contracts historically.