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.
February 6, 2013 FASB Board MeetingInsurance contracts. The FASB continued its discussions of the proposed insurance contracts standard. The Boards discussed (1) accounting for guarantees, (2) modifications of insurance contracts, and (3) foreign currency transactions.
Project Scope—Accounting for Guarantees
The Board tentatively decided that the proposed insurance contracts standard should apply to all guarantee contracts that meet the definition of an insurance contract except those that have any of the following characteristics (unless the guarantee meets any other scope exception previously tentatively decided on by the Board):
- The insurer is not exposed to risk throughout the term of the guarantee, that is, from inception of the contract and throughout its term either through direct legal ownership of the guaranteed obligation or through a back-to-back arrangement with another party that is required by the back-to-back arrangement to maintain direct ownership of the guaranteed obligation.
- A guarantee or an indemnification is of an entity’s own future performance.
- Guarantees issued by an entity that are both (a) unusual or nonrecurring and (b) unrelated to the type of risk that is the subject of other guarantees issued by the entity.
- The guarantee is addressed in the following areas of the Codification:
- Guarantees addressed in Topic 840, Leases:
- A lessee’s guarantee of the residual value of the leased property at the expiration of the lease term.
- A contract that is accounted for as contingent rent.
- A seller-lessee's residual value guarantee if that guarantee results in the seller-lessee deferring profit from the sale greater than or equal to the gross amount of the guarantee.
- A sales incentive program in which a manufacturer contractually guarantees that the purchaser will receive a minimum resale amount at the time the equipment is disposed of, if that guarantee prevents the manufacturer from being able to account for a transaction as a sale of an asset, as described in paragraphs 840-10-55-12 through 55-25. (Because a manufacturer continues to recognize the residual value of the equipment it guaranteed [it is included in the seller-lessor's net investment in the lease], if the sales incentive program qualified to be reported as a sales-type lease, it still would not be within the scope of this Topic because this Topic does not apply to a guarantee for which the underlying is related to an asset of the guarantor.)
- A contract that provides for payments that constitute a vendor rebate (by the guarantor) based either on the sales revenues of, or the number of units sold by, the guaranteed party or on the volume of purchases by the buyer, which are discussed in Topic 605, Revenue Recognition.
- A guarantee or an indemnification whose existence prevents the guarantor from being able to either account for a transaction as the sale of an asset that is related to the guarantee’s underlying or recognize in earnings the profit from that sale transaction. This would include, among other items, the following:
- A transaction that involves the sale of a marketable security to a third-party buyer with the buyer's having an option to put the security back to the seller at a specified future date or dates for a fixed price, if the existence of the put option prevents the transferor from accounting for the transaction as a sale, as described in paragraphs 860-20-55-20 through 55-23.
- Guarantees addressed in Topic 360, Property, Plant, and Equipment:
- A seller's guarantee of the return of a buyer's investment or return on investment of a real estate property.
- A seller's guarantee of a specified level of operations of a real estate property.
- A guarantee for which the guarantor’s obligation would be reported as an equity item rather than a liability under Topic 480, Distinguishing Liabilities from Equity, and Topic 505, Equity.
- Guarantees addressed in Topic 840, Leases:
- A guarantee between related parties or entities under common control when the issuer of the guarantee is not also issuing similar guarantees to third parties.
- A guarantee of debt owed to a third party by a related party or entity under common control when the issuer of the guarantee is not also issuing similar guarantees of debt owed by third parties.
The Board tentatively decided that:
- An insurer should derecognize an existing contract and recognize a new contract (under the applicable guidance for the new contract) if it amends the contract in a way that would have resulted in a different assessment of either of the following items had the amended terms been in place at the inception of the contract:
- Whether the contract is within the scope of the insurance contract standard
- Whether to use the premium allocation approach or the building-block approach to account for the insurance contract.
- Additionally, an insurer should derecognize an existing contract and recognize a new contract if any of the following conditions exist:
- The insured event, risk, or period of coverage of the contract has changed, as noted by significant changes in the kind and degree of mortality risk, morbidity risk, or other insurance risk, if any.
- The nature of the investment return rights (for example, whether amounts are determined by formulas specified by the contract, pass through of actual performance of referenced investments, or at the discretion of the insurer) accounted for as part of the insurance contract, if any, between the insurance enterprise and the contract holder has changed.
- Any additional deposit, premium, or charge relating to the original benefit or coverage, in excess of amounts specified or allowed in the original contract, is required to effect the transaction; or if there is a reduction in the original benefit or coverage, the deposit, premiums, or charges are not reduced by an amount at least equal to the corresponding reduction in benefits or coverage.
- There is a net reduction in the contract holder’s account value or the cash surrender value, if any exists, other than resulting from distributions to the contract holder or contract designee or charges related to newly purchased or elected benefits or coverages.
- There is a change in the participation or dividend features of the contract, if any such features exist.
The Board tentatively decided that for remeasurement of foreign currency transactions, all financial statement components related to an insurance contract should be classified as monetary.
The Board will continue its discussions at its meeting on February 13, 2013.