The Financial Accounting Standards Board has released a ruling that could help public U.S. companies invest more of their own cash in life settlements.
In the past, publicly traded U.S. life settlement firms have had trouble using their own money and cash from U.S. investors to buy life insurance policies because they believed that accounting rules required them to treat the policies as assets with a value less than or equal to the cash surrender value. Cash surrender values are typically much lower than life settlement policy purchase prices, settlement firms say.
Now FASB, Norwalk, Conn., has released a FASB Staff Position, in FASB Technical Bulletin 85-4-1, that lets purchasers of life insurance policies choose between using the investment method or the fair value method to value the policies.
Companies can choose the valuation method on an “instrument by instrument” basis. Once a company decides how to treat a policy purchase, the decision is irrevocable, FASB says in the technical bulletin.
Purchasers that use the investment method can “recognize the initial investment at the transaction price plus all initial direct external costs.” The investor cannot recognize a gain until the insured dies. At that point, the investor can recognize in earnings the difference between the carrying amount of the life settlement contract and the life insurance proceeds paid on the underlying life insurance policy, FASB says.
Purchasers that use the fair value method can recognize the initial investment at the transaction price, then recognize estimated changes in the fair value at each accounting period.
An investor must report assets recorded using the fair value method separately from the assets recorded using the investment method.
Investors subject to the new guidelines will have to report the number of life settlement contracts held using each valuation method, the carrying value of those contracts, and the face value of the life insurance policies behind the life settlement contracts, FASB says.
Life Partners Holdings Inc., Waco, Texas, the only publicly traded U.S. company that specializes in life settlements, has issued a statement welcoming the bulletin.
The accounting change will affect life settlements which Life Partners purchases for itself as well as all of its clients that are required to follow generally accepted accounting principles, the company says.
“We are delighted that the FASB has agreed with our position,” Life Partners Chairman Brian Pardo says in the statement. “By its adoption of these new rules, FASB has recognized the significance of life settlements as an emerging alternative asset class.”
A copy of the FASB bulletin is on the Web at Document Link