Insurance Contracts

Date recorded:

Measurement approach

The IASB staff briefed the Boards on each other's latest decisions (taken earlier in the week) on their preferred measurement approach. The FASB supported the current fulfilment value approach; the IASB was continuing to consider both a 'modified IAS 37' model and the current fulfilment value approach.

The FASB supports the building block approach for Day 1 measurement, but does not agree with including a transfer notion with respect to subsequent measurement - because there is often no transfer market for insurance liabilities (this is why a 'pure' fair value measure will not work).

There was a good but inconclusive debate between IASB and FASB members, which demonstrated some of the basic measurement issues, including what was the liability being measured - the performance obligation or the claims liability? Board members noted that whatever model was accepted, it needed to be logical, easy to explain, supported by preparers and useful to users.

No decisions were made by either Board. Both would consider this further and make decisions in September and return to a joint discussion in October.

Acquisition costs

Both Boards agree that acquisition costs should be expensed; the IASB's tentative view is that it would release some of the premium (customer consideration) to match the incremental costs of acquiring the individual insurance contract. The Boards discussed whether they could resolve this issue.

An IASB member suggested that the IASB should be asking whether the insurer should recognise the insurance contract itself as an asset on Day 1 and amortise that asset over some period. Heretofore, the insurance industry had used deferred acquisition costs as a surrogate for the contract value.

The FASB Chairman challenged the IASB's agreed position, asking why an insurance contract was any different from other long-tail business for which significant acquisition costs were incurred.

The FASB affirmed its view (5 in favour of expense); the IASB was split: 4 would expense; 8 would release revenue. An IASB member also polled his colleagues as to how many would prefer to measure the value of the insurance contract asset - at least 5 would.

The IASB will need to return to this issue at a later date.

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