NEWS RELEASE 05/26/06
FASB Seeks Constituent Views on the Bifurcation of Insurance and Reinsurance Contracts
Board Invites Comments on Project to Improve Financial Reporting for Insurance Accounting
Norwalk, CT, May 26, 2006—As part of a broader initiative to improve financial reporting for insurance accounting, the FASB today announced that it is seeking constituent comment and perspective on the potential bifurcation of insurance and reinsurance contracts into insurance components and financing components.
Today’s Invitation to Comment (ITC) reflects the Board’s concern about a possible lack of transparency in the financial statements of both policyholders and (re)insurance companies relating to the depiction of insurance risk associated with contracts that include terms or features that significantly limit the actual amount of risk transferred. Such contracts are frequently referred to as finite risk contracts, though today’s ITC is not exclusive to finite risk contracts.
Current accounting standards that provide guidance for insurance accounting mainly address financial reporting by insurance and reinsurance companies. These standards provide only limited guidance on how to account for insurance contracts by policyholders. Moreover, insurance and reinsurance contracts often have both insurance components and financing components which are combined and accounted for simply as “insurance contracts.”
Accordingly, the Board seeks to gather information about whether bifurcation would improve financial reporting by providing users of financial statements with better information about the economic substance of insurance arrangements.
Bifurcation would divide some or all of such contracts into two main components for financial reporting purposes. Components of such contracts that transfer significant insurance risk would be accounted for under existing insurance accounting guidance and generally provide an income statement benefit (recovery) in the period of an insured loss. Financing components that are accounted for as deposits would be recorded as an asset by the policyholder. Any recovery from an insured event would reduce the deposit and not have a significant income statement benefit.
The Invitation to Comment requests specific information from buyers and sellers of insurance and reinsurance contracts and the users of their financial statements.
“The FASB is encouraging the active participation of all constituents in this process, however, we are particularly interested in hearing from noninsurance company policyholders—including smaller and private companies,” said Jeffrey Cropsey, FASB Project Manager. “Bifurcation could have a significant impact on the way some insurance contracts are accounted for and we want to ensure that all parties have an opportunity to carefully consider the issues and express their points of view.”
The comment deadline for today’s ITC is August 24, 2006.
About the Financial Accounting Standards Board
Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors, and others rely on credible, transparent and comparable financial information. For more information about the FASB, visit our website at www.fasb.org.