Financial guarantee insurance companies stand behind trillions of dollars in financial obligations — including many of the mortgages that have recently fallen into default.So the Securities and Exchange Commission had good reason to call for new disclosures and clarifications of existing accounting and financial reporting standards.
Well before the mortgage crisis, the Financial Accounting Standards Board accepted the SEC’s request and launched a project which in late May of this year culminated in Statement 163, Accounting for Financial Guarantee Insurance Contracts.
While the issuance of the statement is timely, its timing has raised eyebrows.
The International Accounting Standards Board is working on a standard to cover insurance contracts in general, with a final statement possible by 2010. Between now and then, FASB and the IASB may take on a joint project to converge international and U.S. standards, quite likely resulting in amendments to Statement 163.
FASB project manager Mark Trench said that the concurrent completion of the project and the occurrence of the mortgage crisis was only coincidental. “The SEC asked us to specifically look at how [financial guarantee companies] report their claim liabilities,” he said. “They were all using different methods. The SEC just wanted us to reduce the diversity of practice. Our board then decided to look at the entire financial guarantee accounting model, and the result is Statement 163.”
The scope of the new statement is limited to financial guarantee insurance contracts issued by enterprises within the scope of Statement 60, Accounting and Reporting by Insurance Enterprises. While FASB couches the standard as being based on the principles in Statement 60, the insurance sector tends to see it more as a new accounting model — one that they’ll have to adopt in little more than six months.
The new standard clarifies the recognition and measurement of premium revenue and claim liabilities in guarantee insurance contracts. For fiscal years beginning after Dec. 15, 2008, insurance companies will have to recognize a claim liability prior to an insured event if there is evidence of credit deterioration in an insured financial obligation.
The statement also expands disclosures about guarantee insurance contracts, effective in the first reporting period beginning after the issuance of the statement. Insurance companies will need to disclose the risk-management activities that they used to evaluate credit deterioration in insured financial obligations. They will also need to disclose losses across their portfolios and their watch lists of troubled clients.
“This will affect their lives deeply,” Trench said. “We have changed their revenue recognition, [and] they are going to have to reconfigure, if not create, new systems to track that information. The claims side of it shouldn’t be as bad, because most of them have watch lists that they use, so even though they may be setting up claim liabilities differently, they all seem to have the same underlying information.”
Sean Leonard, chairman of the Financial Affairs Committee of the Association of Financial Guaranty Insurers and senior vice president and chief financial officer of AMBAC Financial Group, said that his association is satisfied with the statement.
“From the industry perspective, we welcome a consistent method of financial reporting,” Leonard said. “We think FASB, through its exposure process, considered industry comments and made some changes that the industry thought were appropriate.”
Leonard also noted that the industry has little time to gear up for the new standard. “The timing is a bit tight,” he said, “so obviously we need to quickly address the new requirements and make appropriate systems and process changes.”
Trench said that in the third quarter of 2008 the board might consider whether to join with the IASB in pursuing a more general standard on insurance contracts.
Statement 163 can be downloaded from the FASB Web site at www.fasb.org.
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