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Insurance Contracts

Date recorded:

Acquisition costs

The Boards have consistently held the view that insurers should recognise acquisition costs as an expense when incurred and, at inception, a part of the premium equal to the acquisition costs incurred should not be recognised as revenue. Responses to the field test questionnaire indicated that this proposal would have a significant effect for life insurers and would not give useful information. At the time of the decision, the Boards were still discussing the extent to which the insurance project should be consistent with the revenue recognition project or should focus on the direct measurement of the contract liability. Since then, the Boards have affirmed that the measurement model to be applied is a hybrid of the direct measurement and allocation of a positive difference between expected premiums and cash outflows plus a risk margin. Therefore, the staff requested to explore the question of acquisition costs and presented the Boards with the following four alternatives:

  • Alternative A. recognise all acquisition costs as an expense when incurred and not recognise a part of the premium as revenue (Boards' current decision);
  • Alternative B. the direct measurement of contract liability should be calibrated to the premium excluding incremental acquisition costs;
  • Alternative C. incremental acquisition costs should be included in the contract cash flows to determine the residual margin at inception of contract; or
  • Alternative D. an intangible asset should be recognised measured at the amount of incremental acquisition costs.

Several Board members were opposed to changing the current decision as it would imply that insurance is being treated in a special way and expressed strong support for alternative A. They were also of the opinion that these costs do not form part of the contract liability and, therefore, should be expensed.

A few other Board members favoured alternative C as they see this as consistent with the building block model developed specifically for insurance, and in that way insurance is special, whereas other Board members indicated that they could support either alternative B or C, depending on how acquisition costs are defined.

One Board member, originally supporting alternative A, suggested a modified alternative A using an example whereby an insurance contract includes a clause stating that if the contract is not renewed, the customer owes an amount to the insurance entity for acquisition costs incurred. This 'debt' of the customer will usually be offset against the settlement value of the contract. In this scenario, the insurer will recover the acquisition costs either through renewal or through a reduced settlement value. The modified alternative A would entail all acquisition costs being expensed and a receivable recognised for the costs expected to be recovered.

The Boards deliberated the matter for some time but could not reach a common view. The majority of Board members requested more time to consider the matter and a further analysis of the mechanics and implications of each alternative. In order to give the staff some direction, the Boards were asked to vote for either alternatives A, B/C, or D. The majority of FASB members supported alternative A, whereas the majority of IASB members supported alternative B/C. The Boards asked the staff to explore these alternatives further including the modified alternative A and bring the issue back for further discussion at a future meeting.

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