FASB and IASB make progress on insurance project

BY KEN TYSIAC

FASB and the International Accounting Standards Board (IASB) reached tentative decisions on reinsurance and issues related to policy loans and contract modifications, including riders, in their ongoing, joint convergence project on insurance.

The progress on insurance during last week’s joint board meeting was reported on FASB’s website, where the full text of the decisions is posted. FASB also made decisions last week in its financial instruments project on classification and measurement and impairment.

The boards differed in their tentative decisions on one aspect of reinsurance. FASB tentatively decided that a reinsurer should apply the building block approach rather than the premium allocation approach if either of the following conditions is met at the contract inception date:

  • Before a claim is incurred, it is likely that there will be a significant change in the expectations of the net cash flows required to fulfill the contract, or
  • Significant judgment is required to allocate the premium to the insurer’s obligation to each reporting period.


FASB tentatively decided that a cedant should account for a reinsurance contract using the same approach (building block or premium allocation) that the cedant uses to account for the underlying direct insurance contracts. Contracts that reinsure insurance contracts measured using both approaches should be separated on the basis of the underlying measurement model. Each component should be accounted for using the same approach used in the underlying direct insurance contracts.

The IASB tentatively decided that the cedant and reinsurer should evaluate which approach to use in the same manner in which an insurer would evaluate a direct insurance contract. Premium allocation would be permitted if it would produce measurements that are a reasonable proxy to those produced by the building block approach.

The boards will continue their discussions on insurance in May.

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

SPONSORED REPORT

Get your clients ready for tax season

These year-end tax planning strategies address recent tax law changes enacted to help taxpayers deal with the pandemic, such as tax credits for sick leave and family leave and new rules for retirement plan distributions, as well as techniques for putting your clients in the best possible tax position.

RESOURCES

Keeping you informed and prepared amid the coronavirus crisis

We’re gathering the latest news stories along with relevant columns, tips, podcasts, and videos on this page, along with curated items from our archives to help with uncertainty and disruption.