Project Updates
Financial Guarantee Insurance
Project Summary
Last Updated: February 14, 2008 (Updated sections are indicated with an asterisk *)
The staff has prepared this summary of Board decisions for information purposes only. Those Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.
Project Objective
Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*Next Steps
*Board/Other Public Meetings
Background Information
Contact Information
Project Objective
The objective of the Financial Guarantee Insurance project is to improve the comparability of financial reporting by insurance enterprises by establishing a single approach for recognition and measurement of financial guarantee insurance contracts under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. The focus of that reporting is on premium revenue and claim liabilities. A related objective is to improve the usefulness of information provided to financial statement users by expanding disclosures about financial guarantee insurance contracts.
Due Process Documents
On April 18, 2007, the Board issued an Exposure Draft, Accounting for Financial Guarantee Insurance Contracts, with a 60-day comment period. The comment period ended on June 18, 2007. On September 4, 2007, the Board held a public roundtable meeting with respondents to the Exposure Draft to discuss significant issues raised in comment letters.
*Decisions Reached at the Last Meeting (1/30/08)
The Board concluded redeliberations of the Exposure Draft. As part of these redeliberations, the Board decided the following:
Disclosure
An insurance enterprise should use the contractual term when disclosing the premium receivable (asset), the unearned premium revenue (liability), and the run-off of the unearned premium revenue (liability). However, in instances where the expected term is used to measure those assets or liabilities, the related disclosures should reflect the expected term.
An insurance enterprise will not be required to display the accretion of the premium receivable (asset) as investment income. However, it will be required to disclose the amount of accretion and the line item in which it is reported in the income statement.
An insurance enterprise should disclose the weighted-average discount rate used to measure the claim liability, a schedule of future expected cash receipts related to the premium receivable (asset), and the line item in which the accretion of the claim liability is recognized in the income statement. In addition, an insurance enterprise should disclose information about potential recoveries as part of the disclosures about the surveillance list. It will not be required to disclose information about the remaining quarters of the current annual period in the schedule of runoff of the unearned premium revenue (liability) and the expected future cash receipts. However, an insurance enterprise should disclose information about the four quarters of the subsequent annual period, the next four annual periods, and the remaining periods aggregated in five-year increments.
An insurance enterprise should disclose a rollforward of the premium receivable (asset). That rollforward would include the beginning premium receivable (asset) balance, new business written during the period, cash receipts received during the period, adjustments, and the ending premium receivable (asset) balance. As part of the disclosure of adjustments, the enterprise will be required to provide a separate display of the adjustment for changes in prepayment assumptions affecting the expected term.
Effective Date
The final Statement will be effective for financial statements issued for fiscal years beginning after December 15, 2008, and for interim periods within those fiscal years. In addition, beginning the first quarter after issuance of the final Statement, an insurance enterprise will be required to make certain disclosures describing the surveillance list. These disclosures include:
- A description of each surveillance category.
- The insurance enterprise’s policies for categorizing an insured financial obligation and monitoring each surveillance category.
- The insurance enterprise’s policies for avoiding or mitigating claim liabilities, the related expense and liability reported during the period for those risk mitigation activities, and a description of where that expense is reported in the statement of income and the statement of financial position.
- A schedule of the insured financial obligations included on the surveillance list at the end of each period. That schedule should detail the following, at a minimum, for each surveillance category: the number of financial guarantee insurance contracts, the insured contractual payments outstanding (segregating principal and interest), and the remaining weighted-average term.
Transition
Consistent with the Exposure Draft, the guidance should be applied to existing and future financial guarantee insurance contracts issued by an insurance enterprise as of the beginning of the fiscal year in which the guidance is initially applied. An insurance enterprise should recognize the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained earnings for that fiscal year. In addition, in the first interim period of the fiscal year in which the guidance is initially applied, an insurance enterprise should disclose the cumulative effect of the change on retained earnings in the statement of financial position. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before the initial application of the Statement and the amounts recognized in the statement of financial position at initial application; it should be measured using current information at that date. The discount rates should reflect the relevant risk-free rate at the date the Statement is initially applied.
*Summary of Decisions Reached to Date
As part of its redeliberations of the Exposure Draft, the Board decided the following:
Scope
The application of the final Statement should be limited to financial guarantee insurance (and reinsurance) contracts issued by insurance enterprises.
Recognition and Measurement
An insurance enterprise should recognize a claim liability on a financial guarantee insurance contract when the insurance enterprise expects that a claim loss will exceed the unearned premium revenue (liability) for that contract based on expected cash flows. The discount rate used to measure the claim liability should be based on the risk-free market rate and updated each quarter (with additional disclosures to be addressed at a future meeting).
Premium revenue recognition guidance will be provided; the premium revenue recognition approach will be based on applying a fixed percentage of the premium to the amount of outstanding exposure at each reporting date (referred to as the level-yield approach). The term of financial guarantee insurance contracts should be the contractual term unless the insured financial obligation is subject to prepayments and those prepayments are probable and reasonably estimated. However, the Board requested that the staff draft and present at a future meeting a principle that prescribes when prepayment data are used to shorten the term of the contract. The measurement of outstanding exposure should be based on the remaining principal payments (in the case of an insured financial obligation that does not pay interest [such as a zero-coupon bond], the outstanding exposure is the accreted principal amount).
An insurance enterprise should recognize an asset for the premium receivable and a liability for the unearned premium revenue at inception of a financial guarantee insurance contract where premiums are received in installments.
An enterprise can use prepayment assumptions to determine the expected term of a financial guarantee insurance contract if (1) prepayments on the insured financial obligation are probable, (2) the timing and amount of prepayments can be reasonably estimated, and (3) the pool of assets underlying the insured financial obligation are subject to prepayment. Adjustments for subsequent changes in those prepayment assumptions would be made on a prospective basis. In all other instances, contractual terms would be used.
An enterprise should use the risk-free rate as the discount rate used to measure the premium receivable (asset) and the unearned premium revenue (liability). The risk-free rate should only be updated for a change in estimate.
Disclosure
The Board will not provide prescriptive guidance on the display of the accretion of the premium receivable (asset) in the income statement. It will address disclosure requirements regarding the accretion of the premium receivable (asset) through the income statement at a future meeting. (See Decisions Reached at the Last Meeting.)
*Next Steps
The Board directed the staff to proceed to a draft of a final Statement for vote by written ballot.
*Board/Other Public Meetings
The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.
The following are links to the minutes for each meeting.
| January 30, 2008 |
*Board Meeting—Redeliberations of the Exposure Draft, which included disclosures, effective date, and transition. |
| January 9, 2008 |
*Board Meeting—Redeliberations of the Exposure Draft, which included the recognition and measurement of the premium receivable (asset) and the unearned premium revenue (liability) for financial guarantee insurance contracts where the premium is received over time based on a fixed rate. |
| November 21, 2007 |
Board Meeting—Redeliberations of the Exposure Draft which included scope, claim liability recognition and measurement, and premium revenue recognition. |
| December 6, 2006 |
Board Meeting—Discussion of the appropriate interest rate to use and whether that interest rate should be locked-in at inception or updated periodically in discounting the expected present value of installment premiums (both the asset and the liability), pre-claims liabilities, and claims liabilities. |
| November 29, 2006 |
Board Meeting—Discussion of remaining issues identified during the drafting of the proposed Interpretation of Statement 60, for financial guarantee insurance contracts as well as disclosures, effective date, transition, and exposure period. |
| September 13, 2006 |
Board Meeting—Discussion of premium revenue recognition approaches (including the accounting for installment premiums) and amortization of deferred acquisition costs. Also reaffirmed decision reached at the August 9, 2006 Board meeting concerning a claims recognition approach for financial guarantee insurance contracts. |
| August 9, 2006 |
Board Meeting—Discussion of claims recognition approaches for financial guarantee insurance contracts. |
| June 8, 2005 |
Board Meeting—Addition of project to agenda and discussion of the project’s scope. |
Background Information
FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, which was issued in June 1982, is the primary source of accounting and reporting guidance for all insurance enterprises. However, many financial guarantors contend that Statement 60 does not sufficiently address the unique aspects of financial guarantee insurance contracts, noting that such contracts did not come into existence until after Statement 60 was adopted. Specifically, Statement 60 provides different guidance for short-duration insurance contracts than for long-duration contracts. Financial guarantee contracts have attributes of both. As a result, there is diversity in practice in applying Statement 60 guidance to financial guarantee insurance contracts. In June 2005, the Board added this project to its agenda to address that diversity.
Contact Information
Mark Trench
Project Manager
metrench@fasb.org
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