IASB/FASB joint meeting
(This section was omitted from the IASB Update as published on 3 October due to an administrative error.)
The IASB and FASB met on 24 September 2012 to continue their joint discussions on insurance contracts. They discussed the accounting for acquisition costs in the pre-coverage period and transition requirements.
Acquisition costs in the pre-coverage period
The boards tentatively decided that acquisition costs incurred before a contract’s coverage period begins should be recognised as part of the insurance contracts liability for the portfolio of contracts, if the contract will be recognised once the coverage period begins.
All IASB members and 6 FASB members supported this decision and 1 FASB member opposed it.
The boards tentatively decided that when an insurer first applies the new insurance contracts standard, the insurer shall:
- At the beginning of the earliest period presented:
- Measure the present value of the fulfilment cash flows using current estimates at the date of transition (ie as of the earliest period presented).
- Account for the acquisition costs in accordance with the board’s existing tentative decisions for acquisition costs and derecognise any existing balances of deferred acquisition costs
All IASB members and FASB members supported this decision
- Determine the single or residual margin at the beginning of the earliest period presented, as follows:
- Determine the margin through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.
- If it is impracticable to determine the cumulative effect of applying that change in accounting principle retrospectively to all prior periods, the insurer is required to apply the new policy to all contracts issued after the start of the earliest period for which retrospective application is practicable (ie apply retrospectively as far back as is practicable).
- For contracts issued in earlier periods for which retrospective application would normally be considered impracticable because it would require significant estimates that are not based solely on objective information, an insurer shall estimate what the margin would have been if the insurer had been able to apply the new standard retrospectively. In such cases, an insurer need not undertake exhaustive efforts to obtain objective information but shall take into account all objective information that is reasonably available.
- If it is impracticable to apply the new accounting policies retrospectively for other reasons, an insurer shall apply the general requirements of ASC Topic 250-10/IAS 8 that are relevant to situations in which there are limitations on retrospective application (ie measure the margin by reference to the carrying value before transition).
Eleven IASB members and seven FASB members supported this decision and four IASB members opposed it.
The boards asked the staff to consider developing a constraint, or set of constraints, on the estimated amount of the single or residual margin. In addition, the FASB asked the staff to explore a practical expedient that might allow insurers to determine the margin based on the definition of portfolios during the retrospective period.
Determining the discount rate
The boards tentatively decided that, for those periods for which it would be impracticable to determine the discount rate that would reflect the characteristics of the liability, insurers shall, determine the discount rate as follows:
- Calculate the discount rate in accordance with the standard for a minimum of three years and. If possible, determine an observable rate that approximates the calculated rates. If there is not an observable rate that approximates the calculated rate then determine the spread between the calculated rate and an observable rate.
- Use the same observable reference point to determine the rate (plus or minus the spread determined in (a) if applicable) to be applied at the contract inception for contracts that were issued in the retrospective period.
- Apply the yield curve corresponding to that rate to the expected cash flows for contracts recognised in the retrospective period to determine the single or residual margin at contract inception.
- Use the rate from the reference yield curve reflecting the duration of the liability for recognising interest expense on the liability.
- Recognise in other comprehensive income the cumulative effect of the difference between that rate and the discount rate determined at the transition date.
Thirteen IASB members and all FASB members supported this decision and two IASB members opposed it.
The boards tentatively decided that insurers shall make the disclosures required by ASC Topic 250-10/IAS 8. In addition, insurers shall make the following, more specific, disclosures:
- If full retrospective application is impracticable, the earliest practicable date to which the insurer applied the guidance retrospectively.
- The method used to estimate the expected remaining residual or single margin for insurance contracts issued before that earliest practicable date, including the extent to which the insurer has used information that is objective; and separately, the extent to which the insurer has used information that is not objective, in determining the margin.
- The method and assumptions used in determining the initial discount rate during the retrospective period.
All IASB members and all FASB members supported the additional disclosures. In addition, the FASB asked the FASB staff to consider whether all the disclosures in ASC Topic 250-10 should be required.
The boards also tentatively decided that an insurer need not disclose previously unpublished information about claims development that occurred earlier than five years before the end of the first financial year in which it first applies the new guidance. Furthermore, if it is impracticable, when an insurer first applies the guidance, to prepare information about the claims development that occurred before the beginning of the earliest period for which the insurer presents full comparable information, it shall disclose that fact. (This decision confirms the proposal in the IASB’s ED.) All IASB members and all FASB members supported this decision.
One IASB member was not able to be present for this session. Consequently, only fourteen IASB members voted on each issue.
The IASB met on 26 September 2012 to continue its discussions on Insurance Contracts. During this session the IASB received an update from the FASB’s meetings on FASB-only issues held in July and August 2012. The IASB also discussed accretion of interest on the residual margin, disclosure requirements and the next due process steps for the Insurance Contract project.
Residual margin—accretion of interest
The IASB tentatively decided that, consistently with the proposals in the original Exposure Draft (ED):
- An insurer should accrete interest on the residual margin. Ten members present agreed with the proposal.
- The rate used for the accretion of interest should be the discount rate of the liability determined at initial recognition, ie a locked-in rate. Ten members present agreed with the proposal.
The IASB also tentatively decided that it would not provide additional guidance on estimating the discount rate that related to the accretion of interest on the residual margin. All members present agreed with the proposal.
The IASB tentatively agreed with the disclosure package as set out by the staff in Agenda Paper 16F Disclosures: Overview and with the proposed drafting, including requirements that insurers should:
- disclose gains or losses arising on contract modifications, commutation or derecognition;
- provide reconciliations between the opening and closing carrying amounts of insurance contract liabilities and insurance contract assets, including information about the carrying amounts of onerous contract liabilities recognised in the pre-coverage period; the expected present value of fulfilment cash flows, the risk adjustment and the residual margin; and
- disclose amounts payable on demand in a way that highlights the relationship between such amounts and the carrying amount of the related contracts.
The IASB tentatively decided not to add more guidance on the level of disaggregation of the reconciliation of carrying amounts beyond the requirements to (a) consider the level of detail necessary to satisfy the disclosure objective; and (b) to aggregate or disaggregate data so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have different characteristics.
The IASB tentatively decided to delete the specific disclosure proposed in paragraph 89 of the ED about contracts for which uncertainty about the amount and timing of claims payments is not typically fully resolved within one year.
All members present agreed with the disclosure package.
The IASB decided that it would not explore further disclosures about the effect of regulation on reported equity in the Insurance Contracts project. Seven members present agreed with this decision.
Review Draft or re-expose
Although the deliberations on the Insurance Contracts project are not yet complete, given the stage of the deliberations and the desire to provide greater certainty to the market, the IASB discussed whether the IASB should proceed to an IFRS as its next step, perhaps with a Review Draft being made publicly available, or publish a revised Exposure Draft. The IASB discussed the progress that has been made on the Insurance Contracts project, and acknowledged the length of time that has been devoted to the project and the importance of issuing a final Standard in a timely fashion. The IASB discussed the substantive nature of the changes made since the ED and the importance of evaluating each change within the context of the overall model. The IASB also considered the importance of obtaining constituents’ input on targeted areas and of adjusting the model, if necessary, as a result of that input. On balance, the IASB decided to published a revised Exposure Draft of the proposals on accounting for insurance contracts but to seek feedback only on the following issues:
- the requirement that the cash flows used to measure participating contracts should be based on the cash flows used to account for the underlying items (mirroring approach);
- the requirement to present premiums in the statement of comprehensive income, which has two consequential decisions:
- the part of the premium that relates to investment components is excluded from the premium presented in the statement of comprehensive income; and
- the premiums are allocated in the statement of comprehensive income on an earned basis (to be discussed at a future meeting);
- the requirement to use the residual margin to offset changes in estimates of future cash flows (unlocking);
- the requirement to present in Other Comprehensive Income changes in the discount rate used to measure the insurance contract liability; and
- the proposed transition requirements, including the tentative decisions made at the September meeting as well as those that will be made at future meetings.
While the IASB noted that the Exposure Draft would include the full text of the proposed Standard, it would also be necessary to clearly inform stakeholders that after re-exposure the IASB does not intend to revisit aspects of the proposed Standard other than those targeted areas set out above.
Twelve members present agreed with the decision to re-expose.
All IASB members present agreed that all mandatory Due Process steps have been taken in developing the Insurance Contracts project.
The FASB continued their discussion on Insurance Contracts in the week beginning 1 October 2012.
The IASB will continue its joint discussions with the FASB on the Insurance Contracts project at their meeting in October 2012.