The IASB and FASB continued their discussions on insurance contracts by considering the separation of investment components from the insurance contract. In addition, the IASB considered its previous decisions on risk adjustment and residual margin and held an education session on other comprehensive income.
Separation of investment components from the insurance contract
The boards tentatively decided that if the investment component is distinct, an insurer shall unbundle the investment component and apply the applicable IFRSs or US GAAP in accounting for the investment component.
The boards tentatively decided that an investment component is distinct if the investment component and the insurance component are not highly interrelated.
Indicators that an investment component is highly interrelated with an insurance component are:
- a lack of possibility for one of the components to lapse or mature without the other component also lapsing or maturing;
- if the products are not sold in the same market or jurisdiction; or
- if the value of the insurance component depends on the value of the investment component or if the value of the investment component depends on the value of the insurance component.
An insurer shall account for investment components that are not distinct from the insurance contract together with the insurance component under the insurance contracts standard.
Twelve IASB members and seven FASB members agreed.
The boards confirmed their previous tentative decisions regarding separation from insurance contracts, as follows:
- Embedded derivatives: unbundled when the embedded derivative is not closely related (for the IASB) or clearly and closely related (for the FASB) to the insurance component.
- Non-insurance goods and services: unbundled when the performance obligation to provide the goods or services is distinct, as previously defined by the boards.
- Investment components: exclude from the premium presented in the statement of comprehensive income an amount for an investment component as previously defined by the boards. The IASB previously tentatively decided that this should be the amount that the insurer is obligated to pay to policyholders or to their beneficiaries, regardless of whether an insured event occurs. The FASB will vote in a future meeting on how to determine the amount that is excluded from the premium presented in the statement of comprehensive income.
All IASB members and FASB members agreed.
The boards tentatively decided that insurers should be prohibited from applying revenue recognition or financial instrument standards to components of an insurance contract when unbundling is not required.
Thirteen IASB members and seven FASB members agreed.
Risk adjustment and residual margin - IASB only
The IASB tentatively decided to confirm its previous decisions on the risk adjustment and residual margin, namely:
- That the measurement of an insurance contract should include an updated, explicit risk adjustment. 11 IASB members agreed.
- That changes in estimates of future cash flows should be offset in the residual margin. Ten IASB members agreed.
The IASB also decided that it would not explore whether other changes in estimates should be offset in the residual margin. Seven IASB members agreed.
Use of other comprehensive income
The boards tentatively decided that an insurer should:
- present in OCI changes in the insurance liability arising from changes in the discount rate.
Eight IASB members and five FASB members tentatively decided to require the presentation of those changes in OCI in all cases, subject to a future discussion on the treatment of participating insurance contracts (see below).
- not present in OCI changes in the insurance liability arising from changes in interest sensitive cash flow assumptions. thirteen IASB members and five FASB members agreed.
- present in interest expense using the discount rate locked in at inception of the insurance contract. Nine IASB members and seven FASB members agreed.
The boards also tentatively decided:
- that the discount rate locked in at inception of the insurance contract would be applied to changes in expected cash flows. Twelve IASB members and six FASB members agreed.
- not to include a loss recognition test in their proposed requirements. Thirteen IASB members and six FASB members agreed. 1 FASB member opposed this decision and 1 IASB member abstained.
The boards will consider at a future meeting how the above decisions will apply to participating insurance contracts including the interaction with previous tentative decisions for participating insurance contracts.
Acquisition costs in the building block approach
The IASB tentatively confirmed that an insurer should include acquisition costs in the cash flows used to determine the margin (and hence the insurance contract liability), rather than account for them as a separate deferred acquisition cost asset.
Ten Board members agreed.
The FASB tentatively decided against an approach that would require an insurer to expense the acquisition costs and recognise income equal to, and offsetting, those costs when the acquisition costs are incurred (Alternative C in Agenda Paper 2C/83C). Six FASB members agreed.
At a future meeting, the FASB will consider the following two approaches:
- An approach which recognises the right to recover acquisition costs as an asset (Alternative A in Agenda Paper 2C/83C).
- An approach which requires an insurer to recognise a reduction in the margin when the acquisition costs are incurred, with no effect in the statement of comprehensive income. The acquisition costs would be shown net against the single margin and allocated to profit or loss in the same way as the single margin (Alternative B in Agenda Paper 2C/83C).
The FASB will consider acquisition costs in the premium allocation approach in a future meeting.
The boards will continue their discussion on insurance contracts in the week commencing 11 June 2012.