Insurance Accounting Newsletter
On 30 July 2010, the International Accounting Standards Board (IASB) published its Exposure Draft of the new IFRS for insurance contracts. This is a major milestone in the creation of an improved reporting framework for insurance under International Financial Reporting Standards. In February 2012 the target publication date of the standard was further delayed, with an estimated publication date in the fourth quarter of this year. Preparation for the new IFRS will require significant investment and the detailed assessment of the new proposals will be a key step in what is expected to be a complex implementation challenge. It is hoped that the benefits of these efforts will bring more consistency and transparency to insurance reporting than there is under the current IFRS regime, which in turn should enhance insurers’ ability to raise capital.
The Insurance Accounting Newsletter provides a regular update on the development of the new accounting requirements and a detailed analysis.
The last chance to influence the IASB on the new IFRS on insurance contracts – A closer look at the new proposals
This edition focuses on the five key areas of the 2013 ED where the IASB seeks feedback and describes the considerable business challenges which lie ahead for the insurance industry in relation to addressing these areas.
IASB published on 20 June its revised exposure draft ED/2013/7 on Insurance Contracts (the 2013 ED) which will remain open for comments until 25 October. This comment period may mark the final opportunity for the insurance industry to influence the new IFRS on Insurance Contracts expected to be released during the second half of 2014. Although the IASB has re‑exposed the entire text of the draft IFRS, it only seeks targeted comments on five areas, thus most parts of the new IFRS should be treated as nearly final. The five areas are those where the IASB judged there was significant change from the original model presented in the 2010 ED.
On the other hand, the FASB has published on 27 June 2013 an exposure draft of a new US pronouncement for insurance contracts. This document presents the new accounting model for insurance contracts that has been developed jointly with the IASB. However, as commented in several past issues of our Insurance Accounting Newsletter, the proposal is not fully converged with the 2013 ED of the IASB and material differences remain. These are not covered in this issue of Deloitte’s Insurance Accounting Newsletter. Finally, from a due process perspective, the US exposure draft is open for comments on the entire model given that FASB had only published a discussion paper in 2010.
Our Insurance Accounting Newsletter series summarises the debates as well as tentative decisions taken by the Boards, up to and including August 2013.
To find out more about these and other important developments, please download our Insurance Accounting Newsletter issue 28.
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November 2012: Greater certainty on the roadmap to the new IFRSs comes with a likely end of IFRS-US GAAP convergence on insurance
Insurance Accounting Newsletter issue 27 (PDF,118 KB)
Since our last Insurance Accounting Newsletter there have been significant outcomes following an increased level of activity from both the IASB and the FASB. The last decision in this period has perhaps the most impact as it significantly removes the uncertainty on the timetable for the adoption of the new IFRSs.
At their meeting on 19 October the IASB decided that they will not change the mandatory effective date of IFRS 9 ‘Financial Instruments – Recognition and Measurement’ from the 1 January 2015. They also decided that the IFRS 4 – Phase II ‘Insurance Contracts’ will be effective approximately three years after its publication date. This is currently targeted for 2014 which results in a mandatory effective date of 1 January 2017 – one year later than anticipated prior to this recent round of decisions. The IASB acknowledges that this date may slip by a further year to 2018 if the final IFRS is released towards the very end of 2014. The final draft of the new IFRS is due to be released in April or May next year and that will be the last opportunity for interested parties to comment on the proposals before they become mandatory.
From the perspective of the content of these final rules, the joint meeting between the IASB and the FASB on 24 September approved the long-awaited transition requirements, in particular considering the practical expedient for restating the residual/single margin for policies in-force at the transition date which would represent the major source of accounting profit under both the future IFRS and US GAAP. This issue is critical particularly for the life insurers.
Finally, the IASB and FASB joint meeting on 17 October approved the presentation of premiums and claims in the statement of comprehensive income with the ‘Earned Premium’ presentation being selected on the grounds that it was a better indicator of future performance and more consistent with ‘revenue recognition’ in other industries.
August 2012: The ‘OCI solution’ is in and convergence is increasingly out
Insurance Accounting Newsletter issue 26(PDF,480 KB)
Since our last Insurance Accounting Newsletter , 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 preferring a deduction from the residual margin.
- June 2012: Convergence on insurance still at risk despite progress made in recent months
Insurance Accounting Newsletter issue 25 (PDF, 472 KB)
At their meetings in late February, March and April, the Boards discussed and made progress on several core issues such as, the Premium Allocation Approach eligibility criteria, a practical expedient, the unit of account definition, the onerous contract test, disaggregation of investment components and patterns of profit recognition.
The Boards’ chairmen met with the Financial Stability Board in April; at that meeting, they committed to complete all of the four major projects (insurance contracts, financial instruments, revenue from customers and leases) by the middle of 2013. A bold target that seems to have been undermined by a recent statement of the FASB chairman who admitted the difficulty on agreeing with the IASB on insurance may suggest to FASB the choice of disengaging from a convergence effort with the IASB.
- March 2012: Old disagreements and new delays make convergence uncertain
Insurance Accounting Newsletter issue 24 (PDF, 252 KB)
At their meetings in December and January, the Boards discussed and made progress on several core issues such as, the unit of account and consideration of risk diversification, discounting of claims liability, onerous contracts and issues relating to participating contracts. The premium allocation approach was covered in two separate education sessions, although the highly anticipated joint FASB/IASB meeting was cancelled at the last minute and deferred to the recent February joint meeting.
- December 2011: Refining divergent positions and a gleam of hope from IFRS 9 planned revisions
Insurance Accounting Newsletter issue 23 (PDF, 115 KB)
The Boards’ recent action arose from four meetings held in September, October and November, which this newsletter covers, as well as other FASB meetings. Whilst the discussions have been at times particularly intense, the activity itself has resulted in limited progress as unsettled debates resurfaced. Nearly all the tentative decisions from these meetings resulted in further refinements of the divergent positions which helped constituents in their appreciation of the practical implications that each model will have on their businesses. Of particular importance, the IASB unanimously agreed to consider targeted improvements to the classification and measurement requirements of IFRS 9 “Financial Instruments” to address the issues emerging from the accounting mismatches within insurance businesses that the combined effect of IFRS 9 and the new IFRS on Insurance Contracts could cause.
- August 2011: The post-Tweedie insurance project: an uncertain horizon
Insurance Accounting Newsletter issue 22 (PDF, 604 KB)
Despite assurance to the contrary, progress has slowed dramatically, with only three meetings being held in the past two months. In addition, the target publication date of the final standard has been further delayed into the second half of 2012, and there is very likely to be a re-exposure of the standard prior to its final issuance. In the meetings on 13 June, 15 June and 21 July, new disagreements between the two Boards emerged, adding further obstacles to achieving a converged solution. Key topics discussed were the residual margin, acquisition costs, presentation of insurance contracts in the statement of comprehensive income and short-duration contracts. After the IASB August recess, the Boards intend to meet more frequently in an effort to finalise the remaining issues.
- May 2011: Progress continues, divergence remains
Insurance Accounting Newsletter issue 21 (PDF, 127 KB)
The two Boards have held several meetings since our last publication, including a whole day meeting of the Insurance Working Group on the 16 May. Although progress was achieved on some issues, significant disagreements remain between the two Boards, in particular the one on whether to use a separate risk adjustment or a composite margin. These persistent divergences leave uncertainty on whether the Insurance Contracts project will be completed on a convergent basis between IFRS and US GAAP. Having said that, The Boards will continue to meet regularly over the next few months in an effort to finalise the remaining issues, such as the disagreement on the risk adjustment, a solution to the accounting mismatch, and the development of presentation and disclosure requirements.
- April 2011: Project timetable extended by a few additional months
Insurance Accounting Newsletter issue 20 (PDF, 96 KB)
The joint meetings between the two Boards have continued with reduced pace in April after a very intense push during February and March. The plan for the next few months seems uncertain though, in view of a podcast released by the chairmen of the two Boards indicating that the insurance project may be pushed out a number of months to allow for a satisfactory resolution of all the remaining issues. Apart from this delay, the Boards appear to be continuing to build consensus on the shape of the final standard. With the exception of unbundling, always a contentious topic, the Boards have agreed several topics including explicit risk adjustments, contract boundaries, bifurcation of embedded derivatives and top-down discount rates.
- March 2011: “Unsuccessful efforts” split the Boards
Insurance Accounting Newsletter issue 19 (PDF, 144 KB).
The joint meetings between the two Boards have continued with great intensity since our previous newsletter. The progress of the joint project on insurance accounting has hit the first stumbling block as the Boards disagreed on how to account for distribution costs incurred to add new business to insurance portfolios. A number of convergent tentative decisions have been reached as well as convergent directional guidance issued to the staff of the two Boards. The Boards held a number of meetings in February and March, with nearly twenty hours of deliberations on the insurance project. Key topics discussed include acquisition costs, discount rates, the scope of the insurance standard and the definition of an insurance contract.
- February 2011: Gearing up for the last mile
Insurance Accounting Newsletter issue 18 (PDF, 131 KB)
The IASB and the FASB are now well under way with their deliberations on insurance accounting as various Board meetings took place in January and throughout February, which include several hours dedicated to insurance. Among others, the subjects of acquisition costs, risk adjustment and discount rates are being discussed at those meetings.
- August 2010: the start of a new accounting era
Insurance Accounting Newsletter issue 17 (PDF, 148 KB)
To help your organisation with the assessment of the technical requirements of this proposed standard, Deloitte has produced this Insurance Accounting Newsletter, analysing the key accounting and actuarial implications. This is the first of a series of thought pieces following the publication of the Exposure Draft. Our next publication will focus on the wider commercial and business implications including the impacts on products.
- July 2010: Last minute convergence
Insurance Accounting Newsletter issue 16 (PDF, 128 KB)
Following several meetings in June between the IASB and FASB (Insurance Accounting Standards Board and Financial Accounting Standards Board), a number of long standing disagreements between the Boards were resolved. Of particular interest, the important issues of acquisition costs and participating contracts were discussed and agreement was reached. Most of the other outstanding topics were discussed, such as unbundling, presentation, cash flows and risk adjustment techniques, and the Boards agreed on what they would present/ask in the Exposure Draft (ED).
- June 2010: Almost there
Insurance Accounting Newsletter issue 15 (PDF, 113 KB)
A number of papers were reviewed in May and early June, and the two Boards reached several tentative agreements on transitional provisions, scoping and business combinations and portfolio transfers. Unfortunately, a number of new differences arose – margins remain contentious, and unbundling has proved difficult.
- May 2010: Steady, if slow progress
Insurance Accounting Newsletter issue 14 (PDF, 112 KB)
A number of papers were reviewed in April and the two Boards reached several tentative decisions. Key amongst them is the tentative agreement on discount rates. This edition of our newsletter reports on the discussions that took place in April on discounting, margins, measurement, contract boundaries and recognition.
- April 2010: Standard setting crunch time
Insurance Accounting Newsletter issue 13 (PDF, 116 KB)
This edition of our newsletter reports on the discussions that took place in March on acquisition cost and day one measurement, risk adjustment, participating contracts, the definition of insurance and the scope of the standard. To find out more about these and other important developments, please download our complete newsletter here. The IASB website shows an expected publication date of the Exposure Draft as May 2010 with a comment period until September 2010.
- March 2010: Insurance accounting taking shape
Insurance Accounting Newsletter issue 12 (PDF, 132 KB)
This edition of our newsletter reports on the discussions that took place in February on the subject of financial statement presentation, accounting for reinsurance contracts, unbundling and embedded derivatives, and variable or unit-linked type contracts. The expected publication date of the Exposure Draft is May 2010 with a comment period until September 2010.
- February 2010: The road to convergence
Insurance Accounting Newsletter issue 11 (PDF, 123 KB)
The Boards have started the year with a busy schedule of meetings, two joint ones having already taken place in January. This edition reports on the discussions held in the three hour long meeting of 19 January and the subsequent FASB meeting on 27 January. The long awaited exposure draft is finally taking shape and although a few issues remain unresolved, the road to convergence for insurance accounting is in sight. The expected publication date of the Exposure Draft is May 2010 with a comment period until September 2010.
- January 2009: Insurance global GAAP in the making
Insurance Accounting Newsletter issue 10 (PDF, 119 KB)
The FASB and the IASB held joint meetings during December and early January. The Boards re-confirmed their commitment to convergence and worked through the differences on the measurement model agreeing on new accounting principles that remove most of their fundamental disagreements. The expected publication date of the Exposure Draft has now been pushed back to May 2010 with a comment period until September 2010.
- November 2009: Welcomed convergence?
Insurance Accounting Newsletter -November 2009 (PDF, 350 KB)
The FASB and the IASB have held several meetings during October and November, including two joint ones. Although a renewed drive towards convergence resulted from the October joint meeting on the subject of initial measurement, it seems that the Boards could not reach the same tentative decision in November on the subject of accounting for participating contracts. Regarding the timetable, the expected publication date of the Exposure Draft has now been pushed back to April 2010, keeping to a four months consultation period.
- October 2009: The new accounting model takes shape
Insurance Accounting Newsletter - October 2009 (PDF, 162 KB)
The IASB met on 18 September 2009 and reached some fairly important decisions on the new accounting model, including the selection of their preferred measurement model, some initial decisions on the subsequent measurement of margins and some principles for the selection of a discount rate.
- August 2009: Filing for divorce?
Insurance Accounting Newsletter – August 2009 (PDF, 115 KB)
The FASB and the IASB held individual and joint meetings in July. Two significant differences of opinion on the measurement basis of the proposed new accounting standard for insurance contracts have emerged.
- July 2009 Special: The Insurance Working Group meeting
Insurance Accounting Newsletter - July Special 2009 (113.43 KB)
This special issue reports on the key issues discussed during the two-day meeting and highlights our own understanding the IWG members comments.
- July 2009: Current Exit Price off the table
Insurance Accounting Newsletter - July 2009 (193.72 KB)
The IASB reached the important conclusion, at its June meeting, in line with FASB, to abandon the Current Exit Price model. A tentative decision was made to replace one of the Current Fulfillment Value models with an alternative model based on the updated IAS 37.
- June 2009: Divergence on new business revenue
Insurance Accounting Newsletter - June 2009 (114.98 KB)
The FASB and the IASB both held meetings were held in May to decide the content of their new convergent insurance accounting standards. The IASB reached a decision on policyholders' behavior and contract boundaries, in line with industry proposals. The FASB discussed margins for risk and acquisition costs and took a tentative decision on new business revenue, divergent from the one taken by the IASB in April.
- May 2009: Margins for risk, new business revenue and calibration
Insurance Accounting Newsletter - May 2009 (234.72 KB)
The IASB has made another step towards the new IFRS for insurance after it reached a set of tentative decisions on insurance accounting at its meeting in April. Although the American FASB discussed the same issues in May, the session was educational rather than decision-making. FASB will attempt to decide on these topics at its next meeting.
- April 2009: Focus on the estimates of insurance cash flows
Insurance Accounting Newsletter - April 2009 (128.70 KB)
The joint work of the IASB and the FASB continued in March with a relatively limited agenda focused on the draft guidance for the estimation of cash flows from insurance contracts.
- March 2009: Conceiving the first global GAAP
Insurance Accounting Newsletter - March 2009 (217.52 KB)
After the extensive background preparation, consultation and education on insurance accounting that has been undertaken so far, the development of the first insurance global GAAP appears to be within reach. Meetings of both the IASB and FASB scheduled throughout 2009 are positive steps towards this goal.