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Insurance contracts

Date recorded:

Background material on unbundling (Paper 1C / 66C)

The IASB Staff started by presenting supporting papers and background on unbundling, summarising some of the comments from respondents to the Exposure Draft (ED) on this subject. Among others, it was noted that the concept of "closely related" was thought to be difficult to interpret and apply and that requests for more guidance and examples were provided in the comment letters. The Staff reiterated the objective of unbundling being the measurement of non insurance components of an insurance contract where the requirements of another standard would provide more useful information than the building blocks approach. A non insurance component is one that is performed irrespectively of the occurrence of the insured event. No questions were asked in this paper.

Unbundling goods and services (Paper 1D / 66D)

The Staff presented three alternatives approaches. Of these, the Staff recommended approach C that goods and services should be unbundled from an insurance contract in accordance with the principles on identifying separate performance obligations developed for the revenue recognition project. Once separated, those goods and services would be measured in accordance with relevant requirements of IFRSs and US GAAP. The other alternatives presented were to:

Although FASB members were generally in favour of the Staff's recommendation, there was much debate about the section which requires an entity to unbundle and account separately for a good or service as a separate performance obligation if "the pattern of transfer of the good or service is different from the pattern of transfer of other promised goods or services in the contract". This wording is taken from the revenue recognition project and the FASB argued that it does not transfer well to a liability measurement model as it would prevent unbundling in cases where the components are clearly unrelated, but the pattern is the same. The majority of the FASB therefore supported the Staff's recommendation only if this criterion is removed or substantially reconsidered.

The IASB were generally supportive of the Staff's recommendation. Some members argued that without guidance, it may be difficult to interpret the principles, and that if examples are provided, their status must be made clear. Most were of the view that the insurance standard should be consistent as much as possible with the revenue recognition standard and therefore, the "transfer pattern" criteria may need to be tested further. IASB noted that if it was necessary to modify the revenue recognition approach to fit the insurance standard, it could lead to confusion between the two approaches and requested that identical wording is kept in the two standards.

The Staff explained that the rationale for introducing the "transfer pattern" criteria was to keep all services in one unit of account if unbundling was done for presentation purposes only without impact on the net result. The IASB took a vote which resulted in a majority being in favour of the recommendation. The IASB asked the Staff to reflect on the various concerns raised and agreed to take this issue to the upcoming Insurance Working Group meeting (IWG), scheduled for 16 May.

Unbundling investment components (Paper 1E / 66E)

The paper considers the meaning of "investment component", the criteria that should be considered for separating the investment component from the insurance contract and whether it should be recognised and measured in accordance with the financial instrument requirements in IFRSs or US GAAP. Again, the Staff reiterated its aim to find a solution where benefits outweigh costs.

The Staff's recommendation is that "explicit account balances in insurance contracts that meet specified criteria should be unbundled. The specified criteria are adapted from those that are being developed for identifying separate performance obligations in the revenue recognition project. If the account balance meets the specified criteria, that component should be accounted for in accordance with the relevant requirements for financial instruments in IFRS / US GAAP."

The FASB initiated the discussions by expressing confusion over the explicit account balance definition and questioning whether a cash surrender value (CSV) would qualify as an explicit account balance. The Staff clarified that it sees a CSV as an integral part of the contract and would therefore consider it as an implicit account balance. Some FASB members were still not convinced by the Staff's explanation and, although they generally agreed with the recommendation, they asked for further clarification or rewording of the "explicit account balance".

The IASB briefly discussed and generally agreed with the Staff's recommendation, although they asked for the issue to be brought before the IWG at their upcoming meeting.

The two other elements in the Staff's recommendation, i.e. the criteria for unbundling and the measurement, were very briefly discussed by the IASB and they received general support. It was however requested that a wording clarification be made regarding the drivers that affect the insurance risk taken on by the insurer, which should be both the amounts paid in by the policyholder and the investment performance.

Although the FASB was also generally supportive of the Staff's recommendation, they were keen to word the criteria as efficiently as possible to avoid having to go through the evaluation process more than once, i.e. for account balances and for goods and services. Having said that, the FASB decided not to vote on these questions as it was felt they were subject to similar issues to those identified for the initial measurement of a financial instrument. Once again, it was agreed to bring this issue forward to the IWG meeting.

This concluded the 4 May IASB meeting.

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