Members of the Financial Accounting Standards Board voted at a meeting Wednesday to scale back FASB’s convergence efforts on insurance accounting standards with the International Accounting Standards Board.
The convergence project on insurance contracts had been considered one of the four priority projects that FASB and the IASB have been working on as they seek to harmonize U.S. GAAP with International Financial Reporting Standards. However, the project was always less of a priority for FASB than the other three projects—revenue recognition, leasing and financial instruments—as the U.S. already has detailed accounting standards in place for insurance, whereas the standards under IFRS are relatively few. Meanwhile, FASB and the IASB have struggled to complete the other three projects in their 12-year-long convergence efforts, although a converged standard on revenue recognition is expected in the first half of this year.
The two boards are also working together in a more multilateral fashion now on setting accounting standards with representatives from other countries and regions as part of the Accounting Standards Advisory Forum.
“At its February 19th board meeting, the FASB decided to limit the scope of its project on insurance contracts to insurance companies,” said FASB spokesperson Christine Klimek. “The FASB also decided to focus on making targeted improvements to existing U.S. GAAP, as opposed to continuing with a comprehensive project on insurance contracts. For short-duration contracts, the Board decided to limit the targeted improvements to enhancing disclosures. For long-duration contracts, the Board concluded that decisions reached by the IASB in its 2013 Exposure Draft, Insurance Contracts, should be considered when contemplating improvements to existing U.S. GAAP.”
Last June, under outgoing FASB chair Leslie Seidman, FASB issued an exposure draft with a set of proposed changes in insurance accounting standards, a week after the IASB released its own exposure draft proposals (see FASB Proposes Major Changes in Insurance Accounting and IASB Revises Proposals for Insurance Contract Accounting). The new chairman of FASB, Russell Golden, took over last July and the board began holding roundtable discussions with constituents last December to get feedback on the proposed changes (see FASB Plans Roundtables on Insurance Contract Standards). The board learned that there was not much of a groundswell of demand in the U.S. for radical changes in the standards.
“These decisions were made because U.S. stakeholders—particularly investors—said they believed that U.S. GAAP generally serves their needs for many types of contracts,” said Klimek. “They said that the FASB should focus on improving existing GAAP, and that the proposals contained in the FASB’s 2013 Exposure Draft on insurance contracts would not result in improvements.”
Along with investors, the insurance industry also opposed many of the changes. The National Association of Mutual Insurance Companies, which bills itself as the largest property and casualty insurance trade association in the country, greeted the news of FASB’s decision.
NAMIC president and CEO Charles Chamness said FASB had made the right decision to keep what he called "the gold standard" of insurance accounting methods.
“For the past year, we have forcefully advocated against changes to GAAP accounting for insurance contracts that would deviate significantly from current statutory accounting reporting requirements,” he said in a statement. “GAAP are universally recognized as the gold standard in the world of accounting, and we’re obviously very pleased the FASB came to agree with us.”
NAMIC said it had mounted a multifaceted campaign to thwart the imposition of the new international requirements on U.S. GAAP, engaging insurance companies to submit letters to both FASB and the IASB. More than 70 comment letters were filed, all of which objected to any shift away from the existing requirements.
NAMIC also said it worked closely with the staff of the National Association of Insurance Commissioners during its analysis of the IASB and FASB exposure drafts. In addition, it said it communicated its concerns to the Federal Insurance Office and other federal agencies. NAMIC staff also participated in one of the roundtable discussions that FASB convened on the issue in December.