The ‘OCI solution’ is in and convergence is increasingly out
Insurance Accounting Newsletter | August 2012
The IASB and FASB have delivered the key components of a so called ‘OCI solution’ that would keep current value measures on the balance sheet of insurers and uses equity (via the Other Comprehensive Income (OCI)) to recognise interest rate short term fluctuations.
On the asset side, the Boards agreed to introduce accounting for debt securities at fair value with unrealised mark to market changes through equity. An option to designate investments at full fair value through income will remain when they are matched by changes through income for the effect on liabilities from discount rates fluctuations. On the liability side, the revaluation of insurance liabilities based on market interest rates will be allocated between equity and income with the impact of market interest rates changes being recognised first to equity. The unwinding of the discounting will go through income at the market discount rate determined at inception. This rate will remain ‘locked-in’.
The unfavourable trend away from a converged accounting standard for insurance contracts was corroborated by the IASB, confirming its preference for a two margins model (the risk adjustment, residual margin) with the residual margin unlocked for prospective changes in estimates and by the Boards remaining divergent on acquisition costs with FASB preferring an asset recognition approach, while IASB prefer a deduction from the residual margin.