Insurance Contracts

Date recorded:

Resolution of significant differences in technical decisions by the two Boards

The staff used this meeting to reconcile the significant areas where the Boards have reached different decisions. The resolution of the differences on the project is integral to the timely completion of deliberations and subsequent issuances of an exposure draft. The staff presented three areas where the Boards had reached different conclusions:

  1. Policyholder accounting
  2. Measurement objective
  3. Acquisition costs

Policyholder accounting

The scope of the project initially included accounting by both the issuer of the insurance contract (the insurer) and the purchaser of the insurance contract (the policyholder). However, the IASB tentatively decided at a previous meeting not to address policyholder accounting in the exposure draft. The FASB had not yet discussed whether policyholder accounting should be included or excluded from the exposure draft.

The Boards discussed whether policyholder accounting should be included or excluded from the exposure draft. The Boards agreed that the staff should further evaluate the potential scope of the project and come back at a later Board meeting to discuss whether policyholder contracts should be within the scope of the Exposure Draft.

Measurement objective

The Boards discussed the measurement approaches for insurance contracts. At previous Board meetings, the IASB tentatively selected the measurement approach being developed in the project to amend IAS 37, modified to exclude day one gains, and the FASB tentatively selected a current fulfilment approach with a composite margin.

The Boards discussed the similarities and differences between the two measurement models. The Boards noted that the words used to describe the models were causing confusion and emphasised the importance of using the correct words. The Boards agreed that the staff would present to the Boards at a future meeting the concepts of both measurement models, using the correct words to describe each model.

Acquisition Costs

Previously both Boards had reached a tentative decision that acquisition costs should be expensed. Subsequently, the IASB had tentatively decided that at inception an insurer should recognise revenue premium to cover acquisition costs incurred. Therefore, acquisition costs should be limited to the incremental costs of issuing (that is, selling, underwriting, and initiating) an insurance contract and should not include other direct costs. In contrast, the FASB had believed the insurer should not recognise any revenue (or income) to offset the acquisition costs incurred.

The Boards extensively questioned why insurance contracts would recognise revenue differently from other industries. Many Board members believe that no performance obligation is satisfied upon signing of the contract and, therefore, no revenue should be recognised at inception. It was tentatively decided by the Boards that an insurer would not recognise any premium at inception to offset the acquisition costs.

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