The Financial Accounting Standards Board issued a proposal to improve the accounting for financial guarantee insurance contracts.The proposal, “Accounting and Reporting by Insurance Enterprises: An Interpretation of FASB Statement No. 60,” is aimed at reducing diversity in accounting treatment and providing financial statement users with clearer, more comparable information and expanded disclosures. The proposal has also been written in a new format intended to improve its understandability.
Format changes from previous statements include the use of bold text at the beginning of each section to convey the accounting principle for that section and the inclusion of examples in the body of the standard to illustrate the proposed accounting guidance for certain paragraphs.
According to the board, the diversity in the way financial guarantee insurance contracts are accounted for by insurance businesses has resulted in differences in the recognition and measurement of claim liabilities. The exposure draft requires that insurance businesses recognize premium revenue when insured contractual payments are made by the issuer of the insured financial obligation -- essentially assuming that the risk to the insurance business is reduced to the extent of the insured contractual payments made.
The draft also:
- Requires recognition of a claim liability prior to a default (insured event) under certain criteria;
- Requires more consistent claim liability measurement based on the present value of expected cash flows; and,
- Requires expanded disclosures about financial guarantee insurance contracts.
Comments on the proposal are due by June 18. If approved by the board, it would be effective for financial statements issued for fiscal years beginning after December 15, 2007, and all interim periods within those fiscal years.The draft can be reviewed at www.fasb.org/draft/index.shtml.
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