Disaggregation of explicit account balances
The IASB and FASB met to discuss the disaggregation of explicit account balances. This topic has previously been referred to as the unbundling of non-insurance components.
Prior to opening the debate on this issue, the IASB staff summarised the feedback received from the Insurance Working Group (IWG) received on 24 October 2011, when two representatives of the insurance industry presented their proposals for an other comprehensive income (OCI) solution for insurance accounting. The staff reported that IWG members expressed a preference for assets and liabilities to be measured on a consistent basis - either on a current or cost basis ("current-current" or "cost-cost" approaches). The "current-current" approach seemed to be favoured if something along the lines of the OCI solutions proposed is included in the final IFRS to reduce volatility from accounting mismatches. The staff acknowledged that in spite of the significant support observed among the IWG members, a number of questions on the OCI solutions remain unanswered; in particular on the subject of liability adequacy testing and residual margin unlocking.
Moving to the paper on the explicit account balances accounting, the staff highlighted its recommendation that an account balance was explicit if it was an accumulation of the monetary amount, credited with an explicit return. They also clarified that they would distinguish between unbundling and disaggregating non-insurance components. The disaggregation of an explicit account balance would be for presentation purposes only and the insurer would measure the cash flows of the explicit account balance together with all the other cash flows from the insurance contract under the building blocks approach. Subsequent to the completion of the measurement, it would present any explicit account balance separately. The staff asked their first two questions:
- Do the Boards agree that all explicit account balances should be presented separately from the insurance contract liability?
- Do the Boards agree with the following criteria for identifying explicit account balances?
A contract has an explicit account balance if both of the following conditions are present:
- The balance is an accumulation of the monetary amount of transactions between the policyholder and the insurer.
- The balance is credited with an explicit return. A return is explicit if it is determined by applying either of the following to the balance: (1) a contractual formula in which the insurer may have the ability to reset the return rate during the life of the contract or (2) an allocation determined directly by the performance of specified assets.
The FASB chair asked for a vote on the first question noting that they would need to assume that the staff proposal would be a de minimis in terms of disaggregation of account balances and conceding that members may wish to expand it. Both Boards agreed; however, some said that other items would need to be considered and explored further. The Boards decided to avoid the second question because of the underlying issues around what should be included and how it should be measured and preferred to consider the staff's other questions. The staff then put forth the next three questions:
- Do the Boards agree that all explicit account balances and the related assets should be recognised in an insurer's financial statements and that they should not be offset against each other?
- Do the Boards agree that an insurer shall measure explicit account balances and services associated with the explicit account balances, if any, together with the other components of insurance contracts?
- Do the Boards agree that explicit account balances should be presented separately from the insurance contracts liability on the face of the statement of financial position (rather than the notes) in an amount equal to the sum of:
- the explicit account balance, and
- an accrual for all fees and returns though the reporting date?
The staff reiterated that explicit account balances would not be unbundled with a separate measurement from the insurance component of the contract. Instead they would be measured together with the other components of an insurance contract's cash flows. However their disaggregation from the insurance contract carrying amount would result in a separate presentation from it on the face of the statement of financial position. Such an approach would not require the explicit account balances to be discounted. Following inconclusive discussions among Board members, the IASB staff attempted to survey the Boards with some basic questions. When asked if the Board members believe the whole contract should be measured using the building blocks (excluding embedded derivatives, etc. and other items already unbundled), 9 IASB members said they did with 6 members preferring unbundling to disaggregation. However, the IASB members were unanimous that at least disaggregation would be needed in the final IFRS. Finally, the same majority of 9 indicated that they would be comfortable to restrict the disaggregation requirements to explicit account balances only as defined in the staff paper. The other members were prepared to go further in disaggregating deposit components. When asked similar questions, only two FASB members believed that the whole contract should be measured using the building blocks.
The IASB chairman declared that no tentative decisions could be recorded at the end of the session and asked the staff to explore other approaches. He also asked for more concise and thorough papers stating that the length of the paper discussed at this session coupled with the number of questions that remained and needed to be addressed may have been a factor affecting the quality of the debate.