Statements of Position

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This proposed Statement of Position (SOP) provides guidance on accounting by insurance enterprises for demutualizations and the formation of mutual insurance holding companies (MIHC). The proposed SOP also applies to stock insurance enterprises that apply SOP 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises, to account for participating policies that meet the criteria of paragraph 5 of SOP 95-1. The proposed SOP specifies the following: 1. Financial statement presentation of the closed block. Closed block assets, liabilities, revenues, and expenses should be displayed together with all other assets, liabilities, revenues, and expenses of the insurance enterprise based on the nature of the particular item, with appropriate disclosures relating to the closed block. 2. Accounting for predemutualization participating contracts after the demutualization date or formation of an MIHC and for stock insurance enterprises that have adopted SOP 95-1. A demutualized insurance enterprise should continue to apply the guidance of SOP 95-1 to its participating contracts issued before the date of demutualization or formation of the MIHC that are within the scope of SOP 95-1. However, the segregation of undistributed accumulated earnings on participating contracts is meaningful in a stock life insurance company, because the objective of such presentation is to identify amounts that are not distributable to stockholders. Therefore, after the date of demutualization or formation of an MIHC, the provisions of paragraphs 41 and 42 of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 60, Accounting and Reporting by Insurance Enterprises, relating to dividends on participating contracts should apply to such contracts sold before the date of demutualization or formation of the MIHC. 3. Emergence of earnings. Cumulative actual closed block earnings in excess of the expected periodic amounts calculated at the date of demutualization or formation of an MIHC that will not inure to the stockholders should be recorded as an additional liability to closed block policyholders (referred to as a policyholder dividend obligation). 4. Accounting for participating policies sold outside the closed block after the date of demutualization or formation of an MIHC. SOP 95-1 should be applied to participating policies that meet its conditions and are sold outside the closed block after the date of demutualization or formation of the MIHC. However, provisions of paragraphs 41 and 42 of FASB Statement No. 60 relating to dividends to participating contracts should apply to such contracts sold after the date of demutualization or formation of an MIHC. 5. Accounting for expenses related to a demutualization and the formation of an MIHC. Direct incremental costs related to a demutualization or formation of an MIHC should be classified as a single line item in income from continuing operations. 6. Accounting for retained earnings and other comprehensive income at the date of demutualization and formation of an MIHC. An insurance enterprise that demutualizes in a distribution-form demutualization should reclassify all its retained earnings by the demutualization date to capital stock and additional paid-in capital accounts (the capital accounts). A subscription-form demutualization does not by itself result in reclassification of retained earnings. The equity accounts of an MIHC at the date of formation should be determined using the principles for transactions of companies under common control, with the amount of retained earnings of the demutualized insurance enterprise, before reclassification to the capital accounts, being reported as retained earnings of the MIHC. Because the accounting bases and carrying amounts of assets and liabilities are not changed as a consequence of demutualization or formation of an MIHC, the amounts in accumulated other comprehensive income should also not be changed as a consequence of demutualization or formation of an MIHC. 7. Accounting for a distribution from an MIHC to its members. Because the members of an MIHC are also policyholders of the stock insurance subsidiary, a distribution by an MIHC to its members should be accounted for according to the substance of the transaction. Unless there are substantive independent third-party stockholders, the distribution should be accounted for as a policyholder dividend. This proposed SOP is effective for annual financial statements for years beginning after December 15, 2000. Early adoption is encouraged. The effect of initially applying this SOP should be reported retroactively through restatement of all previously issued financial statements presented for comparative purposes. The cumulative effect of adopting this SOP should be included in retained earnings in the earliest year restated. Expenses associated with a demutualization should be classified as a single line item in income from continuing operations in interim periods in the year of adoption. All other provisions of this SOP need 6b2 not be applied in financial statements for interim periods in the year of initial application, but amounts reported for those interim periods shall be restated if they are reported with annual financial statements for that fiscal year.

ISBN

ed00-04-03t

Publication Date

2000

Relational Format

Book

Keywords

Insurance -- Accounting -- Standards; Insurance holding companies -- Accounting -- Standards -- United States; Contracts -- Accounting -- Standards -- United States

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants; Exposure draft (American Institute of Certified Public Accountants), 2000, Apr. 3

Proposed statement of position : accounting by insurance enterprises for demutualizations and formations of mutual insurance holding companies and for certain long-duration participating contracts;Accounting by insurance enterprises for demutualizations and formations of mutual insurance holding companies and for certain long-duration participating contracts

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