Yesterday, as part of its efforts to develop a comprehensive insurance standard, the IASB released a revised exposure draft¹ (ED) on accounting for insurance contracts.

The proposal retains key features of the insurance contracts accounting model that was exposed by the IASB in 2010. Under the revised ED, a single accounting model would be required for all insurance contracts. Entities would apply the model at a portfolio level by using a current-fulfillment-value approach and would use such approach to measure an insurance contract liability on the basis of current expected cash flows. The measurement would include explicit amounts for (1) risk and uncertainty and (2) deferral of accounting profits that result on initial recognition (the “contractual service margin”).

The IASB is seeking constituent feedback on the revised ED’s modifications to five key proposals from the 2010 ED. Under the revised ED:

• The contractual service margin would be adjusted for prospective changes in assumptions related to future coverage and services (i.e., the contractual service margin would be unlocked).
• Components of interest expense would be presented separately in profit or loss and other comprehensive income (i.e., the “OCI solution”).
• Insurance contracts for which cash flows are contractually linked to and vary directly with underlying items would use the carrying amounts of the underlying items to account for such cash flows (i.e., the “mirroring approach”).
• For presentation purposes, the definition of insurance revenue (i.e., earned premium) and expenses would be revised.
• First-time adopters of the new standard would use a transition method that requires either a retrospective or a modified retrospective approach.

Insurance contracts is a joint project of the IASB and the FASB but is not part of their Memorandum of Understanding. Although the boards have made progress bridging the differences in their views over the past two years of deliberations and their guidance is similar, they were not able to converge their proposed standards on insurance contracts. The FASB expects to issue its ED soon.

For further details, see Deloitte’s IFRS in Focus on the IASB’s ED.

Comments on the ED are due to the IASB by October 25, 2013.