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Insurance contracts

Date recorded:

Financial guarantee contracts (Paper 2E)

The Staff presented its views on the redeliberation of financial guarantee contracts based on previous discussions with the Boards. The Staff of both IASB and FASB have recommended that the Boards carry forward the existing approach on the scope allocation for financial guarantee contracts that is currently in place under IFRS 4 and IAS 39 within IFRS and several different pronouncements under US GAAP:

IASB recommendations

The Staff recommendation for IFRS was that:

  • Financial guarantee contracts are scoped out of the IFRS for insurance contracts into the IFRS for financial instruments. However IFRS would:
    • permit an issuer of a financial guarantee contract (as defined in IFRSs) to account for the contract as an insurance contract if it had previously asserted that it regards the contract as an insurance contract; and
    • require an issuer to account for a financial guarantee contract (as defined in IFRSs) in accordance with the financial instruments standards in all other cases. Such contracts would be measured initially at fair value (typically equal to the consideration received), with subsequent amortisation of that amount, coupled with a test for credit losses under IAS 37.
  • IFRS retains the current decision that does not provide an exception in the preparation of standalone financial statements for the treatment of intergroup guarantees from the accounting required for financial guarantee contracts.

FASB recommendations

The Staff recommends that the FASB should:

  • Exclude from the scope of the insurance contracts project the accounting for financial guarantees. This would mean that the insurance contracts standard would carry forward the existing guidance such that:
    • Financial guarantees currently within the scope of Topic 944 (formerly FAS 60) should be within the scope of the insurance contracts guidance
    • Financial guarantees within the scope of Topic 815 (formerly FAS 133) and Topic 460 (formerly FIN 45) as well as financial guarantee insurance contracts within the scope of Topic 944 (formerly FAS 163) should not be within the scope of the insurance contracts guidance and should retain current accounting under those standards.
  • Continue current practice under existing U.S. GAAP that provides an exception from recognition requirements for intergroup guarantees.

The Staff asked the Boards to ratify these assumptions. In general, there was full support from the IASB to each of the Staff recommendations.

FASB noted that they agreed with the IASB recommendation for the insurance project but suggested that the Boards should complete the insurance contracts project as planned, complete their deliberations on the impairment of financial assets project and then start a joint FASB/IASB project to develop a convergent treatment of financial guarantee contracts including those issued by members of the same group.

The Boards approved this approach and instructed their Staff to continue their work accordingly.

FASB intends to incorporate the outcomes of this exposure draft in the finalisation of the new US GAAP for insurance contracts. For the IASB this would likely result in possible amendments to both the new IFRS for insurance contract (the IASB aims at issuing it by 30 June 2011) and IFRS 9.

Field testing results (Paper 2F)

The Staff provided a paper to the Boards that highlighted the objectives of the field testing that started in September 2010 and was recently completed.

The Staff clarified that this was an extensive but still targeted field test that did not require a full restatement of participants' financial statements. It was developed with the expectation that participants did not need to invest significantly to adjust their systems, but rather give the best estimate of levels of effort.

Fifteen companies participated, 2 of which were unable to complete the testing in the time frame. The Staff will complete the full analysis of the field testing results during the course of March. However the paper asked the Boards what further information they would like to see as they complete the final discussions on the field testing results later this month. Staff indicated that they had not seen anything that has shown any of preliminary decisions reached so far need to be reopened and that Staff has already reflected the field testing results in each of the Board papers prepared so far. One FASB member requested a mechanism be developed such that all issues identified in the field testing reports are aggregated so that the Boards can be assured they have addressed each concern. The Staff indicated they would work within the parameters of the confidentiality of the field testing to produce this. The Staff were also asked to obtain information about the non-GAAP disclosures that would be presented pre- and post- implementation of the new IFRS with the objective of identifying where the insurance project may not be meeting the requirements of preparers and users.

Information session on uncertainty in the measurement of insurance liabilities (Paper 2I)

The Staff presented their paper on Uncertainty in the Measurement of Insurance Liabilities to the Boards which addressed issues arisen during the discussions in the February meetings. The purpose was to address the Boards' concerns about the potential for double-counting of risk and other measurement items within the building block approach. The paper did not set out to prove the merits of the risk adjustment model, but rather to highlight the relationship between the building blocks. The Staff does not believe there is additional risk compared to other IFRSs of double-counting of these risks.

A few minor questions were asked, but overall the Boards were impressed with the Staff paper and noted that it addressed the concerns previously raised and identified the issues that would need to be discussed at the main March meetings.

Acquisition costs (Paper 2G)

In the 2 February meeting, the Boards made a decision to include acquisition costs at the portfolio level departing from the contract level criterion included in the Exposure Draft. The Staff had divergent views on a recommendation regarding acquisition costs, and provided the Boards with a recommendation and an alternative view.

The Staff's recommendation was that acquisition costs to be included in cash flows are 1) related only to successful contract acquisitions; 2) limited to direct costs; 3) require application guidance.

The Staff's rationale for limiting acquisition costs to those related to successful contract acquisitions included the following arguments:

  • Unsuccessful efforts do not have a future benefit
  • Consistency with the Boards view in the Exposure Draft basis for conclusions that these costs can be clearly identified with contracts issued
  • Consistency with other standards that these costs are determined at the contract level only for successful sales.

The other foundation of the Staff's recommendation is that these costs shall be direct costs only. The Staff developed a table in paragraph 30 of this paper that attempted to separate typical costs into incremental, direct and both direct and indirect costs.

The Alternative view, which was included in Appendix D, recommended that acquisition costs to be included in the expected cash flows should not be limited to costs for successful contract acquisitions and their identification should be the same as the criterion to identify fulfilment cash flows. Therefore, the alternative view introduced the concept of "directly attributable" costs which would include certain indirect costs (for example rent and other overheads for office accommodation used by acquisition activities) to be consistent with the previous tentative decision on the costs to fulfil an obligation on a portfolio of contracts.

There was significant discussion on this topic from both Boards, primarily focused on the successful effort recommendation and the meaning of "direct" or "directly attributable" costs.

The Boards were split on the question of whether to restrict acquisition costs to those related to successful efforts, with the FASB voted unanimously in favour of the Staff's recommendation of a successful efforts approach whilst the IASB voted 10:2 in favour of the Staff's Alternative view inclusive of costs arising from both successful and unsuccessful efforts.

Many IASB members indicated that the definition of acquisition costs should be consistent with that applicable for fulfilment cash flows as acquisition costs are a sub-set of those cash flows. The debate suggested that many IASB and FASB members consider that acquisition costs should include certain costs other than direct costs but no agreement on how such costs should be defined.

The Boards asked that the Staff draft language that better defines "directly attributable" for acquisition costs considering both the definition of fulfilment cash flows as tentatively agreed at the February meeting of the Boards and as well as "direct" costs as used in other IFRSs.

The Boards were in agreement that mandatory application guidance is necessary in the final standard to assist in defining these costs to be included in the expected cash flows and acquisition costs.

Information session on presentation (paper 2H)

This was carried forward to the main March meeting.

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