AALU Cautious Over FASBs Deferral Of Stock Redemption Rule

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The Financial Accounting Standards Board has deferred indefinitely the effective date of a rule which could have had a severe impact on stock redemptions funded by life insurance.

FASB says it is deferring the rule, FSP FAS 150, pending further board action.

Bob Plybon, president of the Association for Advanced Life Underwriting, says it is a good development that FASB postponed the rule, but he adds it is still disturbing that 150 still is hanging out there.

“Our concern,” Plybon says, “is that FASB is there to assure that we have accurate, reliable financial statements to protect the interests of shareholders and creditors of a corporation.

“FAS 150 does just the opposite,” he says.

Small companies that used good estate planning mechanisms could be hit with a liability that wipes out their net worth, Plybon says.

According to an AALU analysis, FAS 150, which was released earlier this year, requires the financial statement reclassification of certain redemption amounts from the category of equity-creating stock to the category of equity-reducing liability, where a binding agreement to redeem that stock existed.

Thus, AALU says, in a redemption situation involving life insurance, such as redemption of a stockholders interest at death, the net worth of the company would be reduced by the amount transferred from stock to debt at the time the agreement is entered into.

This, AALU says, would cause a drastic reduction in the efficacy of standard death-time redemption agreements that often rely heavily on life insurance funding.

Moreover, AALU says, the reduction could prevent or impair company relationships with banks and others.

Plybon says that if FASB insists on taking that approach, it should specify that if the redemption agreement is funded by life insurance, it should carry equal value to the value of the liability.

That, he notes, is the approach taken by the American Institute of Certified Public Accountants.

AALU says it will continue to monitor the issue.

In other news, life insurance agents can expect to receive more communications from their companies on how to respond to national emergencies in ways to assure business continuity and to protect the national infrastructure.

The effort reflects an ongoing partnership between the federal government, law enforcement authorities and the private sector to keep the nation on an even keel as much as possible following a national disaster such as the Sept. 11, 2001, terrorist attacks, says Victoria Fimea, senior counsel with the American Council of Life Insurers.

ACLI, Fimea notes, is the only insurance group that is a member of the Financial Services Sector Coordinating Council (FSSCC), a group of trade associations and financial institutions that will work with the Treasury Department to assure continuity of financial services in the event of an emergency.

FSSCC has four major goals. These include rapid and effective dissemination of information to and from the federal government on threats to financial services, crisis management and response coordination, outreach to all financial institutions, and knowledge sharing to establish best practices.

Carl Wilkerson, chief counsel for securities and litigation with ACLI, says while the effort began after the Sept. 11 attacks, it can trace its roots back to the year 2000 problem (when there were fears of massive computer failures because computers were not programmed to read the year “2000″).

Then, he says, came Sept. 11, followed more recently by the massive blackout that hit much of the northeast United States and the power outages that followed Hurricane Isabel.

The question in each of these situations, Wilkerson says, is how did financial service systems respond?

One thing that was learned, he says, is that computer backup systems were too centralized. It is necessary to decentralize these systems, he says, so they wont be vulnerable to a single event.

Fimea says another issue is how to get real-time information out to companies and agents when there is a problem.

She cites the domino effect of a computer virus, such as the Blaster worm, which could shut down information systems.

To deal with these issues, there is a Financial Services Information Sharing and Analysis Center to alert the financial services industry of problems like computer viruses.

The important thing, Fimea says, is that the life insurance industry will be able to continue to serve the needs of its customers during times of national emergency.

“Life insurers are keenly aware of their responsibilities to policyholders and the need for a well-organized system of communications in the event of a natural disaster,” she says.

Wilkerson adds that it is very constructive for the life insurance industry to have a seat at the table with groups that are federally regulated.

In the past, he says, the insurance industry was left out in the cold on these types of initiatives.

However, Wilkerson says, life insurers developed a good working relationship with Treasury as part of the regulatory process involving the USA Patriot Act.

Treasury officials, he says, have a good sense of the industry, which led to the invitation for ACLI to join the Financial Services Sector Coordinating Council.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 14, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.