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Journal entry — Insurance — FASB concludes deliberations related to disclosures about short-duration contracts

Published on: Mar 12, 2015

At its meeting yesterday, the FASB concluded deliberations related to its project to make targeted improvements to the disclosure requirements for short-duration insurance contracts. The Board directed its staff to proceed with drafting a final standard for a vote by written ballot.

The Board reached decisions about whether:

  • Disclosures about claims development should be presented as required supplementary information (RSI).
  • Tentative disclosure requirements for claim count information should be amended.
  • Incurred but not reported (IBNR) amounts presented in the claims development tables should also include amounts for expected development related to reported claims.

The Board also redeliberated the ASU’s effective dates.

Characterization of information in the claims development tables

After discussing feedback from staff outreach, the FASB concluded that entities should present as RSI  (1) “all years in the claims development table that precede the current reporting period” and (2) “the related disclosure about the history of claims duration.”1  

Editor’s Note: Under auditing standards, RSI is not considered part of an entity’s basic financial statements (i.e., the auditor's opinion on the basic financial statements does not cover RSI) and an auditor would perform only specified procedures related to such information. Although only the information related to the current reporting period would be audited, Board members still believe that entities should include all of the claims development information (i.e., the audited information for the current reporting year and the RSI for the previous years) in a single table to keep the information meaningful for financial statement users.

The final ASU would not prescribe where an entity would present the claims development tables (e.g., outside of the financial statements versus inside the footnotes, with appropriate designation of what is RSI); however, several Board members believe that the ASU should provide examples of possible presentations. Under one alternative, an entity would disclose claims development information for just the current reporting year in the financial statement footnotes and would then provide comprehensive claims development tables outside of the financial statements that would include all years (i.e., information for the current reporting year would be presented both in the audited footnotes (stand-alone) and in the claims development tables presented outside of the financial statements (along with the RSI)).

Information about claim counts

The Board decided to modify its proposed disclosure requirements related to the number of claims incurred (claim counts). This decision was made in response to constituents’ concerns about whether the proposed requirements would be meaningful for investors in light of (1) diverse industry practices related to how such information is computed, (2) questions about the relevance and usefulness of such information for certain product types, and (3) concerns about the practicability of gathering the information for certain product types. Instead, the final ASU will establish “a disclosure objective of providing information about claim frequency, unless it is impracticable to do so.” Furthermore, an entity would have to describe its methods for determining such claim frequency information.

Editor’s Note: Board members believe that such disclosures would include (1) quantitative information about the frequency of claims for different product lines coupled with qualitative information about an entity’s methods of deriving such information or (2) when applicable, an explanation about why providing such information is impracticable. Most Board members also agreed that the final ASU should provide examples of such disclosures and further clarify when the impracticability exception would apply.

Information about IBNR liabilities

As part of its outreach, the Board received feedback that many entities would find it challenging to disclose a “pure” IBNR amount for each accident year presented in the incurred claims development tables because their existing systems do not currently capture such information; instead, these systems combine expected development (i.e., changes in estimates) related to reported claims with pure IBNR. Accordingly, the Board decided to expand the proposed IBNR disclosure requirement “to include IBNR plus expected development on reported claims” for each accident year included in the claims development tables. An entity also would need to explain its methods for determining such amounts.

Effective date

Because of delays in finalizing the project, the Board decided to defer the originally proposed effective dates by one year. Accordingly, the final ASU would become effective for public business entities for annual reporting periods beginning after December 15, 2015, and for interim reporting periods within annual reporting periods beginning after December 15, 2016. All other entities would have an additional year to adopt the standard. Early adoption would be permitted.

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1 All quotations are from the FASB staff’s handout for the March 11, 2015, Board meeting, which is available on the FASB’s Web site.

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