Proposed statement of position : Accounting and reporting by insurance enterprises for certain nontraditional long-duration insurance contracts and for separate accounts;Accounting and reporting by insurance enterprises for certain nontraditional long-duration insurance contracts and for separate accounts
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This Statement of Position (SOP) provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. This SOP requires, among other things, the following: 1. Separate account presentation. This SOP concludes that the portion of separate account assets representing contract holder funds should be measured at fair value and reported in the insurance enterprise's financial statements as a summary total, with an equivalent summary total for related liabilities, if the separate account arrangement meets all of the criteria specified in paragraph 10 of this SOP. If a separate account arrangement does not meet the criteria, assets representing contract holder funds under the arrangement should be accounted for and recognized as general account assets. Any related liability should be accounted for as a general account liability. 2. Interest in separate accounts. This SOP concludes that assets underlying an insurance enterprise's proportionate interest in a separate account do not represent contract holder funds, and thus do not qualify for separate account reporting and valuation. If a separate account arrangement meets the criteria of paragraph 10 of this SOP and (a) the terms of the contract allow the contract holder to invest in additional units in the separate account or (b) the insurance enterprise is marketing contracts that permit funds to be invested in the separate account, the assets underlying the insurance enterprise's proportionate interest in the separate account should be accounted for in a manner consistent with similar assets held by the general account that the insurance enterprise may be required to sell. 3. Gains and losses on the transfer of assets from the general account to a separate account. This SOP concludes that assets transferred from the general account to a separate account should be recognized at fair value to the extent of third-party contract holders' proportionate beneficial interests in the separate account if the separate account arrangement meets the criteria in paragraph 10 of this SOP. Any resulting gain related to the third-party contract holder's proportionate interest should be recognized immediately in earnings of the general account of the insurance enterprise provided that the risks and rewards of ownership have been transferred to contract holders. A guarantee of the asset's value or minimum rate of return or a commitment to repurchase the asset would not transfer the risks of ownership, and no gain should be recognized. If the separate account arrangement does not meet the criteria in paragraph 10 of this SOP, the transfer generally should have no financial reporting effect (that is, general account classification and carrying amounts should be retained). However, in certain situations loss recognition may be appropriate. If the transferred asset is subsequently sold by the separate account, any remaining unrecognized gain related to the insurance enterprise's proportionate beneficial interest should be recognized immediately in the earnings of the general account of the insurance enterprise. If third-party contract holders' proportionate beneficial interests in the separate account are subsequently increased, or the insurance enterprise otherwise reduces its proportionate interest in the separate account arrangement that meets the criteria in paragraph 10 of this SOP, the reduction in the insurance enterprise's proportionate interest may result in additional gain. If an insurance enterprise's proportionate interest subsequently increases as a result of transactions executed at fair value (for example, at net asset value), the increase is considered a purchase from the contract holder and should be recognized at fair value. 4. Liability valuation. This SOP concludes that the basis for determining the balance that accrues to the contract holder for a long-duration insurance or investment contract that is subject to FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, is the accrued account balance as described in FASB Statement No. 97, paragraphs 15 and 17a. The accrued account balance equals: a. Deposit(s) net of withdrawals; b. Plus amounts credited pursuant to the contract; c. Less fees and charges assessed; d. Plus additional interest (for example, persistency bonus); and e. Other adjustments (for example, appreciation or depreciation recognized in accordance with paragraph 19 of this SOP to the extent not already credited and included in (b) above). For contracts that have features that may result in more than one potential account balance, the accrued account balance should be based on the highest contractually determinable balance that will be available in cash or its equivalent without reduction for future fees and charges expected to be assessed. The accrued account balance should not reflect any surrender adjustments (for example, market value annuity adjustments, surrender charges, or credits). 5. Return based on a contractually referenced pool of assets or index. This SOP concludes that for a contract not accounted for under the guidance of FASB Statement No. 133, Accounting for D 1e69 erivative Instruments and Hedging Activities, that provides a return based on the total return of a contractually referenced pool of assets (or a contractually referenced interest rate index) either through crediting rates or termination adjustments, the accrued account balance should be based on the fair value of the referenced pool of assets (or applicable index value) at the balance sheet date even if the related assets are not recognized at fair value. 6. Annuitization options. This SOP concludes that no liability should be recognized during the accumulation phase related to the potential effect of annuitization options. 7. Determining the significance of mortality and morbidity risk and classification of contracts that contain death or other insurance benefit features. This SOP concludes that to determine the accounting under FASB Statement No. 97 for a contract that contains death or other insurance benefit features, the insurance enterprise should first determine whether the contract is an investment or universal life-type contract. If the mortality and morbidity risks are other than nominal and the fees assessed or insurance benefits are not fixed and guaranteed, the contract should be classified as a FASB Statement No. 97 universal-life type contract. The determination of significance should be made at contract inception, other than at transition, and should be based on a comparison of the present value of expected excess payments to be made under insurance benefit features with the present value of all amounts assessed against the contract holder (revenue), under reasonably possible outcomes. 8. Accounting for contracts that contain death or other insurance benefit features. This SOP concludes that for contracts classified as insurance contracts that have amounts assessed against contract holders each period for the insurance benefit feature that are not proportionate to the insurance coverage provided for the period, a liability should be established in addition to the account balance to recognize the portion of such assessments that compensates the insurance enterprise for benefits to be provided in future periods. This SOP concludes that the amount of the additional liability, for an insurance benefit feature that is included in a contract that is classified as an insurance contract and has amounts assessed that are not proportionate to the insurance coverage provided for the period, should be determined based on a ratio equal to the present value of total expected excess payments and related expenses over the life of the contract divided by the present value of total expected assessments over the life of the contract (benefit ratio). The liability at the balance sheet date should be equal to: a. The current benefit ratio multiplied by the cumulative assessments; b. Less the cumulative excess payments and related expenses; c. Plus accreted interest. However, in no event may the liability balance be less than zero. The change in the additional liability should be recognized as a component of benefit expense in the statement of operations. 9. Accounting for contracts that provide only death or other insurance benefit features. This SOP concludes that an insurance enterprise assuming only the insurance benefit feature of underlying contracts in a noncancellable or guaranteed renewable contract, or issuing a contract that provides only an insurance benefit feature that wraps a noninsurance contract, that has been evaluated by the insurance enterprise to have other than nominal mortality and morbidity risk, should calculate a liability for the portion of premiums collected each period that represents amounts to compensate the insurance enterprise for benefits to be provided in future periods, using the methodology as described in paragraphs 26 through 30 of this SOP. 10. Sales inducements to contract holders. This SOP concludes that sales inducements provided to the contract holder, whether for investment or universal life-type contracts, should be recognized as part of the liability for policy benefits over the period for which the contract must remain in force for the contract holder to qualify for the inducement or at the crediting date, if earlier, in accordance with paragraph 18 of this SOP. No adjustments should be made to reduce the liability related to the sales inducements for anticipated surrender charges, persistency, or early withdrawal contractual features. This SOP also concludes that sales inducements that are recognized as part of the liability under paragraph 32 of this SOP, that are explicitly identified in the contract at inception, and that meet the criteria specified in paragraph 33 of this SOP should be deferred and amortized using the same methodology and assumptions used to amortize capitalized acquisition costs. The insurance enterprise should demonstrate that such amounts are (a) incremental to amounts credited on similar contracts without sales inducements; and (b) higher than the contract's expected ongoing crediting rates for periods after the inducement, as applicable; that is, the crediting rate excluding the inducement should be consistent with assumptions used in estimated gross profits or margins, contract illustrations, and interest crediting strategies. The deferred amount should be recognized on the statement of financial position as an asset, and amortization should be recognized as a component of benefit expense. 11. Disclosures. This SOP requires certain disclosures related to the following: a. Separate account assets and liabilities; the nature, extent, and timing of minimum guarantees related to variable contracts and the insurance enterprise's interest in separate accounts (for example, seed money). b. An insurance enterprise's accounting policy for sales inducements, including the nature of the costs capitalized and the method of amortizing those costs, the amount of costs capitalized and amortized for each of the periods presented, and the unamortized balance as of each balance sheet date presented. c. The nature of the liabilities and methods and assumptions used in estimating any contract benefits recognized in excess of the account balance pursuant to paragraphs 17 and 32 of this SOP.
Insurance -- Accounting -- Standards; Insurance companies -- Investments -- United States -- Accounting -- Standards
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American Institute of Certified Public Accountants. Accounting Standards Executive Committee, "Proposed statement of position : Accounting and reporting by insurance enterprises for certain nontraditional long-duration insurance contracts and for separate accounts;Accounting and reporting by insurance enterprises for certain nontraditional long-duration insurance contracts and for separate accounts" (2002). Statements of Position. 295.