Presentation of insurance contracts in the statement of comprehensive income
The FASB Staff introduced the paper explaining that, in developing the current recommendation, consideration had been given to the feedback received from the Boards and the feedback from the outreach on the alternatives presented at a previous meeting. It was also noted that this paper does not cover the statement of financial position (balance sheet), the presentation of purchased reinsurance, nor that of unbundled deposit components.
Volume of insurance contracts sold
According to what the Staff has heard from users and preparers of financial statements, most want to see both volume and margin information. The Staff recommendation to accommodate this request considered three alternative presentation examples with the first one being preferred by the Staff. In developing the alternative examples, the Staff considered three approaches for the premium recognition criteria for the presentation:
- due — consistent with the cash flow estimates in the liability;
- written — consistent with initial liability measurement; or
- earned — consistent with the release of the margins.
The Staff recommended that, for contracts measured using the building block approach, the premium due be presented in the statement of comprehensive income, with no indication that it is revenue. Although several of the Board members expressed a strong preference for using premium earned, which is what they believe users of accounts are used to see, the Staff explained that this approach does not fit with several insurance contracts, in particular those with long term coverage.
The approach recommended separates the underwriting margin between the margin from contracts measured using the modified approach, where the premium earned is presented, and the margin from contracts measured using the building blocks, where the premium due is presented instead.
Presentation of insurance contracts income and expenses
Together with the volume information, the statement of comprehensive income will also show as separate items changes in assumptions, release of the margins, investment income and changes in discount rates. The Boards expressed their agreement that the Staff recommendation is a step forward compared to the ED. However, the Boards' preference appeared evenly split between the two illustrations that were not part of the Staff recommendation. Those favouring example 2 liked that it offered a dual statement presenting separately the contracts measured using the modified approach and those measured using the building block approach, and showing the detail of expected versus actual cash flows for the latter. These Board members argued it was easier to see the profit drivers and how the building blocks developed. It was noted though that the wording should be simplified to remove some of the insurance jargon. A final advantage of this presentation would seem to be the clarity on revenue presentation as, in example 3, premiums are presented on one line leading to an implicit association to a revenue line despite the earlier agreement that volume information should not have this connotation.
On the other hand, those in support of using example 3 noted that it resembles more the traditional statement of comprehensive income, showing premiums due, claims and expenses incurred, release of margins and changes in margins and assumptions. Those in favour of example 3 also argued that it may have most appeal to the industry as it is closer to what they are used to. From a standard setting perspective it would seem to offer a clearer way to set minimum requirements and allow preparers to put additional information in the notes. Such an approach would also have the benefit of avoiding the development of a statement specific to the insurance industry that users would find difficult to understand. The information in the footnotes would still be important and the IFRS should contain specific requirements to allow a consistent disclosure of key performance indicators.
The IASB was split equally between examples 2 and 3 with seven members voting for each, whilst a majority of five members of the FASB against two were in favour of example 2.