Insurance contracts – Acquisition costs
The Boards discussed the accounting for acquisition costs for insurance contracts. The debate was difficult to follow and not helped by the staff, who attempted to 'clarify' a critical element of their recommendation but succeeded only in confusing Board members. Board members were evidently uncomfortable about developing a reporting model for acquisition costs in an insurance contract that was fundamentally different to that developed for revenue contracts.
The Boards tentatively decided that for contracts issued, some acquisition costs should be included in the initial measurement of insurance contracts as contractual cash flows and all other acquisition costs should be expensed as incurred and this determination should be performed at the portfolio level.
The Boards then discussed whether acquisition costs included in the cash flows of insurance contracts should be limited to those that are direct (e.g., salaries) and incremental (e.g., bonuses and commissions) at the portfolio level, or 'direct and direct and incremental'. The staff thought that this construction was necessary to prevent abuse because of US-based experience that involved innovative approaches to what 'direct and incremental' means. The Boards also discussed whether there should be a further limitation to successful contracts only. (Several Board Members appeared confused about the distinction being drawn, since a portfolio could only consist of issued (successful) contracts.) Board members were split on this issue and given that not all Board members were present, this issue will be brought back at a future meeting.