The Financial Accounting Standards Board has released draft abstracts of 2 proposed guidelines that could affect business users of life insurance.
FASB, Norwalk, Conn., helps set accounting standards for the United States.
Both of the new draft abstracts are the fruit of a June 15 meeting of FASB’s Emerging Issues Task Force.
One draft abstract, EITF Issue 06-4, deals with “accounting for deferred compensation and postretirement benefit aspects of endorsement for split-dollar life insurance arrangements.”
That draft, which would take effect for fiscal years starting after Dec. 15 if it is approved, would apply only to businesses that use split-dollar life insurance policies that provide benefits for retirees as well as active employees.
Some employers with split-dollar programs use “endorsement-type” policies with provisions that tie employers’ results to the insurers’ performance. If an insurer’s claims are low, employers end up with policies with higher cash surrender values, but employers end up with lower cash surrender values if the insurer’s experience is poor, according to the FASB task force draft.
Under the proposed guideline, employers with experience-adjusted endorsement-type policies would have to recognize a liability for future life benefits owed to employees.
The liability for the benefit obligation “has not been settled through the purchase of an endorsement-type policy,” according to the task force draft. “The task force believed that the purchase of an endorsement-type policy does not constitute a settlement since the policy does not qualify as non-participating because the policyholders are subject to the favorable and unfavorable experience of the insurance companies.”
The second draft abstract, EITF Issue 06-5, deals with “accounting for purchases of life insurance – determining the amount that could be realized in accordance with FASB Technical Bulletin Number 85-5.”
The second draft sets out the rules employers can follow when calculating the value of corporate-owned life insurance or bank-owned life insurance.
In addition to including the cash surrender value, an employer might include components such as surrender charges, a cash stabilization reserve account and a provision that allows for the recovery of the upfront deferred acquisition costs over a period of several years, according to an example accompanying EITF Issue 06-5.
The FASB task force agreed that employers should consider contractual limits on their ability to get more or less than the cash surrender value when valuing COLI and BOLI.
“Those amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized,” according to the draft. “The task force also agreed that the fixed amounts that are recoverable by the policyholder in future periods in excess of 1 year from the surrender of the policy should be recognized at their present value.”
The draft guideline also deals with situations in which an employer with a multilife insurance program surrenders just a few or all of the policies or an employer with a group life policy surrenders a few or all of the certificates.
Like the other draft guideline, this guideline could take effect for fiscal years starting after Dec. 15.
The draft abstract of EITF 06-4 is at Document Link
The draft abstract of EITF 06-5 is at Document Link