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.