As part of its broader initiative to improve financial reporting for insurance accounting, the Financial Accounting Standards Board is seeking constituent comment and perspective on the potential bifurcation of insurance and reinsurance contracts into insurance components and financing components.FASB said that the invitation to comment aligns with the standards-setter's concerns about a potential lack of transparency in the financials of both policyholders and reinsurance companies.
The insurance financials relate to the depiction of insurance risk associated with contracts that include terms or features that limit the actual amount of risk transferred. FASB said that such contracts are frequently referred to as "finite risk contracts." However, the board said that its invitation to comment would not be restricted to finite risk contracts.
The current standards providing guidance for insurance accounting primarily address financial reporting by insurance and reinsurance companies. However, those standards provide only limited guidance on how to account for insurance contracts by policyholders.
Moreover, FASB pointed out that insurance and reinsurance contracts often have both insurance components and financing components, which are combined and accounted for simply as insurance contracts.
Accordingly, the board wants to gather information about whether bifurcation would improve reporting by providing users of financial statements with better information about the economic substance of insurance arrangements.
How it works
Bifurcation would divide some or all of such contracts into two main components for financial reporting purposes:
* Components of such contracts that transfer significant insurance risk would be accounted for under existing insurance accounting guidance, and would generally provide an income statement benefit (recovery) in the period of an insured loss.
* Financing components that are accounted for as deposits would be recorded as an asset by the policyholder. Any recovery from an insured event would reduce the deposit, and not have a significant income statement benefit.
FASB's invitation to comment requests specific information from buyers and sellers of insurance and reinsurance contracts and the users of their financial statements.
"FASB is encouraging the active participation of all constituents in this process; however, we are particularly interested in hearing from non- insurance company policyholders - including smaller and private companies," said project manager Jeffrey Cropsey, in a statement. "Bifurcation could have a significant impact on the way some insurance contracts are accounted for, and we want to ensure that all parties have an opportunity to carefully consider the issues and express their points of view."
The comment deadline is Aug. 24, 2006. For more information, visit www.fasb.org.
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