FASB tentatively decides on scope of potential targeted improvements to insurance contract accounting

Published on: 17 Apr 2014

At its meeting yesterday, the FASB tentatively decided on the scope of its potential targeted improvements to the accounting for long-duration insurance contracts and the disclosure requirements for short-duration insurance contracts. The Board was not asked to reach any decisions other than those affecting scope and will deliberate the specific aspects of these issues at future meetings. The Board also was not asked to decide whether reinsurance issues should be added to the project’s scope; that determination will be made after the FASB staff performs additional outreach.

Long-Duration Contracts

For long-duration contracts, the FASB tentatively decided that the scope of the insurance contracts project should include targeted improvements related to the following:

  • Liability for future policy benefits.
  • Deferred acquisition costs.
  • Premium deficiency and loss recognition.
  • Disclosures about revenue recognition.
  • Unit of account.

In addition to considering whether measurement assumptions related to the liability for future policy benefits should be locked in at inception or updated periodically, the FASB will consider the propriety of (1) including a provision for adverse deviation in the measurement of such contracts and (2) the types of cash flows included in the liability’s measurement under existing U.S. GAAP. The Board also will discuss how to amortize deferred acquisition costs and whether to clarify the level of aggregation at which the premium deficiency test should be performed, as well as the related disclosures that entities should provide.

Editor’s Note: Board members acknowledged that some of these issues could be interrelated. For example, a decision to require an entity to update the assumptions used to measure the liability for future policy benefits could render moot any questions about premium deficiency. Moreover, issues associated with specifying the appropriate unit of account or defining a portfolio are pervasive and also will be discussed during deliberations.

The FASB also tentatively decided not to include the revenue recognition accounting model or the accounting by mortgage guaranty insurance entities in the scope of its targeted improvements for long-duration contracts; however, it will consider requiring additional disclosures about revenue recognition.

Short-Duration Contracts

On the basis of the FASB staff’s recommendations and the Board’s ensuing discussion, the Board tentatively decided to deliberate at future meetings the following disclosure topics related to short-duration contracts:

  • Incurred- and paid-loss development tables.
  • Claim reserve duration in time bands.
  • Information about claim frequency and severity.
  • Qualitative and quantitative information about claims estimates.
  • Premium deficiency testing information.
  • For discounted contracts, the effects of the discounting.

For each topic, the Board also will deliberate the appropriate frequency of the disclosure (i.e., whether the disclosure should be required for both interim and annual periods).

Editor’s Note: Several Board members believed additional outreach should be performed to determine whether financial statement users would perceive value in requiring entities to disclose the discount rates that they would have used to measure their liabilities had discounting been required. Some Board members questioned whether users would find such disclosures to be a useful starting point when performing their own analysis of the effects of the time value of money.

Board members also will consider the benefits and costs of requiring additional disclosures about short-duration contracts, including incremental auditing costs.


The FASB tentatively decided to address the targeted improvements in phases and to focus on improving disclosures related to short-duration contracts before deliberating long-duration contract accounting and disclosures. Reinsurance issues could then be added as another phase if the Board determines that targeted improvements are warranted.

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