Summary of Board Decisions

Summary of Board decisions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue an Accounting Standards Update.

March 6, 2013 FASB Board Meeting

Insurance contracts.

The FASB continued its discussions of the proposed insurance contracts standard. The Board discussed (1) the treatment of changes in estimated interest crediting and accretion rates, (2) election of the fair value option, and (3) other miscellaneous issues.

Treatment of Changes in Estimated Interest Crediting and Accretion Rates

The Board affirmed its tentative decision from the November 2012 meeting that an insurer would not be required to disaggregate cash flows of a contract into those affected by returns from assets and those not affected by returns from assets when determining discount rates that reflect the characteristics of the contract’s cash flows. The discount rates for the portfolio’s cash flows should reflect the extent to which the amount of any estimated cash flows, subject to insurer discretion, are affected by asset returns.

The Board also decided the following for insurance contracts that are affected by asset returns:
  1. Upon any change in expectations of the crediting rate used to measure the insurance contracts liability, an insurer would:
    1. Reset the interest accretion rates in a manner that recognizes any changes in estimated interest crediting and related ultimate expected cash flows on a level-yield basis over the remaining life of the contracts
    2. Recognize in net income the difference between the prior expected cash flows discounted at the prior interest accretion rates and the revised expected cash flows discounted at the reset interest accretion rates.
    The degree to which the interest accretion rates for the portfolio is adjusted would reflect the relative value of the account balance to be credited and the extent changes in expected amount to be credited to those account balances are the result of changes in expected asset returns.
  2. An insurer would apply the tentative decision on accumulated other comprehensive income (AOCI) for non-asset-affected cash flows. That means an insurer would present as part of AOCI the difference between the insurance contracts liability recorded on the statement of financial position (using the current discount rate) and the amount the insurance contract liability would be if it were determined at the interest accretion rates.
Election of the Fair Value Option

Guarantees and Other Contingencies

The Board decided to eliminate the fair value option election for guarantees and other contingencies accounted for in accordance with Topic 460, Guarantees, or contingencies accounted for in accordance with Topic 450, Contingencies, that will not be within the scope of the forthcoming proposed insurance contracts guidance.

The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the effective date and transition provisions for the proposed Accounting Standards Update, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

Rights and Obligations of Insurance Contracts and Warranties

The Board decided to eliminate the fair value option in paragraph 825-10-15-4(d) through (e) related to rights and obligations under an insurance contract and obligations under a warranty that currently are accounted for under Topic 944, Financial Services—Insurance, or would be accounted for in accordance with the forthcoming proposed insurance contracts guidance. The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the forthcoming proposed insurance contracts guidance.

The Board decided to eliminate the fair value option in paragraph 825-10-15-4(e)) related to rights under a warranty that will be accounted for in accordance with the guidance in the proposed Update on revenue recognition. The Board decided that the effective date and transition provisions to eliminate the fair value option for these items would be consistent with the guidance in the proposed Update on revenue recognition.

Written Loan Commitments

The Board decided to eliminate the fair value option election for written loan commitments in paragraph 825-10-15-4(c). Those written loan commitments are in the scope of the proposed Update on recognition and measurement of financial assets and financial liabilities. The decision to eliminate the fair value option for written loan commitments in paragraph 825-10-15-4(c) would have the same effective date and transition provisions as that proposed Update.

Firm Commitments

The Board tentatively decided to:
  1. Eliminate the fair value option for firm commitments that would otherwise not be recognized at inception and that involve only financial instruments in paragraph 825-10-15-4(b). 
  2. Clarify that the Board’s previous decision to retain and modify the existing model for forwards and option contracts to purchase securities in the Certain Contracts on Debt and Equity Securities Subsections of Subtopic 815-10, Derivatives and Hedging—Overall, would extend to physically settled forward and purchased option contracts (with no intrinsic value at inception) to purchase or sell loans that do not meet the definition of a derivative in Topic 815.
The decisions to eliminate the fair value option for firm commitments in paragraph 825-10-15-4(b) and to extend the model described above to forward and purchased option contracts to purchase or sell loans would have the same effective date and transition provisions as the proposed Update on recognition and measurement of financial assets and financial liabilities.

Other Miscellaneous Issues

Criteria to Account for Contracts under the Premium Allocation Approach

The Board decided to remove the following criterion that, if met, would preclude an insurer from using the premium allocation approach.

"Significant judgment is required to allocate the premium to the insurer's obligation to each reporting period."
 
Related Party Guarantees

The Board decided to clarify the language from the prior Board decision regarding related party guarantees to the following:

"A guarantee between related parties or entities under common control when the issuer of the guarantee is also not issuing similar guarantees to third parties, unless issuance of such guarantees is the primary business purpose of the issuing entity."
 
Accounting for the Excess of the Insurance Liability Measurement over the Fair Value of the Insurance Contracts in a Business Combination

The Board decided to record any excess of the asset and liability balances related to insurance contracts measured in accordance with the proposed guidance above the fair value of those assets and liabilities as a loss at the acquisition date.

Whether or Not to Include Expectations in the Liability for Remaining Coverage under the Premium Allocation Approach

The Board decided to clarify that for contracts reported under the premium allocation approach, an insurer would not include expectations of future changes in coverage (for example, policyholder cancellations) in the cash flows for purposes of measuring the liability for remaining coverage or the gross premium receivable.

Recognition Point for Deferred Annuity Contracts

The Board affirmed previous decisions about recognition point of insurance contracts and to include implementation guidance regarding recognition of deferred annuity contracts.

Treatment of Income Tax Payments and Receipts

The Board decided to clarify in the implementation guidance that cash flows excluded from the measurement of the liability would include income tax payment obligations of the insurer even if the insurance contract permits the insurer to charge back those amounts to policyholders. However, any tax obligations that are incurred by the policyholder and in which the insurer pays those obligations in a fiduciary capacity would be included in the present value of fulfillment cash flows along with any amounts the insurer expects to receive from the policyholder related to those tax amounts.

Next Steps

In a future meeting, the Board will discuss the costs and benefits of the tentative decisions.