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Accounting Boards Consider Insurance Contract Proposals

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The International Accounting Standards Board (IASB) and its U.S. counterpart, the Financial Accounting Standards Board (FASB), are meeting today to consider changing insurance contract reporting rules.

IASB, London, helps set accounting rules for the rules, and FASB, Norwalk, Conn., sets accounting rules for the United States.

IASB today held a board meeting with FASB to consider proposals for insurance contract reporting.

The boards considered papers on topics such as the presentation of comprehensive income and acquisition costs.

The boards also considered topics such as the cash flows that arise as an insurer fulfills an existing insurance contract and “unbundling,” or separating out reporting on distinct components of a product, such as insurance risk, financial risk, instances when there are “separate, observable markets” for components of a product, and instances when there are clear variations in cash flow.

FASB considered an unbundling proposal under the name “bifurcation” in 2006.

In May, IASB and FASB asked staff members to explain more clearly how an entity could decide when “significant interdependence” of product components might make reporting on the components separately impractical.

“Unsurprisingly, the issue about when to unbundle an insurance contract is a difficult and controversial topic,” staff members at the boards write in a paper prepared for the board members. “By its nature, separating a single contract into multiple components can increase complexity (and thus make it more difficult for users to understand financial reporting of these contracts) and increase costs (the preparer is forced in some instances to separate intertwined cash flows, measure some cash flows using a different measurement to comply with the accounting, and track those separate cash flows throughout the life of the contract).”

In spite of the cost, unbundling could be beneficial in instances in which it produces useful information at a reasonable cost, the staffers say.

In some cases, for example, one component will respond differently to a change in circumstances than another component of the product, staffers say.

Either IASB and FASB could explain more clearly how an insurer would assess whether interdependence is significant enough to make unbundling impractical, or the boards could seek a more robust principle for when to unbundle components of an insurance contract, staffers say.

“Regardless of the approach taken, the staff believes that the invitation to comment should address unbundling specifically and clearly the basis for conclusions will need to discuss this issue,” staffers say.

During the joint board meeting FASB members expressed a belief that the concept of “significant interdependence” has not been well-defined.

“I just don’t find the interdependence notion helpful,” Leslie Seidman, a FASB board member, said.

Seidman said she thought IASB and FASB staff members could come up with a more direct explanation for when to unbundle.

But some IASB members, such as Tatsumi Yamada, expressed disappointment about the idea of taking extra time to develop an alternative to the the interdependence concept.

IASB and FASB members ended the meeting by saying staff members should look into finding a way to use the existing definitions of “closely related” and “clearly and closely related” rather than interdependence to help entities decide when to unbundle insurance contract reporting.


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