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July 07, 2006 at 03:39 PM
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.”
