AALU Cautious Over FASBs Deferral Of Stock Redemption Rule
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.