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FINANCIAL REPORTING

Financial reporting

 

September 2013

  FASB proposed an updated standard for the financial reporting of all insurance contracts, not just those written by insurance companies, and asked stakeholders to comment on it by Oct. 25.

The proposal aims to bring consistency to the existing standards under U.S. GAAP, including measurement of insurance liabilities and the related effect on the statement of comprehensive income. Existing GAAP standards evolved over the years in response to the introduction of new products, which led to inconsistencies.

FASB’s proposed standard is the result of a joint insurance contracts project with the International Accounting Standards Board (IASB), which also released a revised exposure draft of proposals meant to improve accounting for insurance contracts. The long-term goal of the joint project is to work toward a converged international standard. The FASB proposal is available at tinyurl.com/kpfapls, and the IASB proposal is available at tinyurl.com/mr5x4h5. Comments on the proposals can be submitted by Oct. 25 at the boards’ respective websites, fasb.org and ifrs.org.

“The proposed standard is intended to bring greater consistency and relevance to the accounting for contracts that transfer significant risk between parties,” Leslie Seidman, whose term as FASB’s chairman ended in June, said in a statement.

The FASB proposal includes significant changes. Among other things, it would:

  • Require contracts that transfer significant insurance risk to be accounted for as insurance, regardless of the type of institution that issued the contract. Therefore, the proposed standard would apply to banks, guarantors, service providers, and other types of insurers, in addition to insurance companies.
  • Establish the principles that an insurer would apply in the recognition, measurement, presentation, and disclosure of insurance contracts issued and reinsurance contracts held in its financial statements.
  • Limit the number of measurement models to two. The building block approach would be applied to most life, annuity, and long-term health contracts. The premium allocation approach would be applied to most property, liability, and short-term health contracts, and some guarantees and service contracts.


  FASB issued a proposal designed to improve disclosures of uncertainties related to an organization’s ability to continue as a going concern.

Under U.S. GAAP, financial statements are prepared under the inherent presumption that the reporting organization will be able to continue as a going concern. FASB explained in a news release that the going-concern presumption is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.

But there is no current guidance in U.S. GAAP about management’s responsibilities in evaluating or disclosing going-concern uncertainties, or when or how uncertainties should be disclosed in an organization’s footnotes.

The Proposed Accounting Standards Update, Presentation of Financial Statements (Topic 205): Disclosure of Uncertainties About an Entity’s Going Concern Presumption, seeks to provide such guidance in an effort to reduce diversity in financial reporting about these uncertainties. The proposal, available at tinyurl.com/k5ukatu, also aims to improve the timeliness and quality of footnote disclosures about uncertainties.

It would do so, FASB said, by incorporating many of the principles currently in the auditing standards, and by:

  • Requiring management to evaluate going-concern uncertainties more frequently.
  • Prescribing a threshold and related guidance for starting disclosures.
  • Requiring an assessment period of 24 months after the financial statement date.
  • Providing a threshold for SEC filers to determine whether there is substantial doubt about an organization’s ability to continue as a going concern.


The proposed guidance would apply to all reporting organizations, including public companies, private companies, and nonpublic not-for-profit organizations, FASB said. Additionally, a public company that is an SEC filer would be required to evaluate and determine whether there is substantial doubt about its ability to continue as a going concern and, if there is substantial doubt, disclose that determination in the footnotes.

Comments on the proposal may be submitted until Sept. 24.


  The AICPA Financial Reporting Executive Committee (FinREC) expressed significant objections to FASB’s financial instruments impairment proposal.

The high-profile project is designed to address some of the causes of the recent financial crisis and calls for measurement and reporting of expected losses rather than incurred losses.

Although the project began as a convergence effort with the IASB, FASB took a different path from the IASB in developing a current expected credit loss (CECL) method for impairment.

In a comment letter to FASB, FinREC said the proposed CECL model, as well as the current IASB proposal, requires significant work to be operational and result in improved, faithful financial reporting. The letter is available at tinyurl.com/n8qrxko. FinREC is a senior committee of the AICPA for financial reporting and is authorized to make statements on behalf of the AICPA on financial reporting matters.

According to FinREC, FASB’s proposed model:

  • Lacks a strong enough conceptual basis for sound financial reporting;
  • Departs significantly from the incurred loss model;
  • Creates two incompatible loss contingency models;
  • Double counts expected losses; and
  • Unjustifiably increases the accounting and financial reporting burden for smaller financial institutions and nonfinancial services entities.


FinREC encouraged FASB to keep working with the IASB to reach a converged, high-quality model for reporting impairment of financial instruments. “Having to maintain more than one financial reporting system has significant costs and adds much complexity to entities’ reporting process,” FinREC wrote.

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