Statements of Position

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Description

This proposed Statement of Position (SOP) provides guidance on how to account for insurance and reinsurance contracts that do not transfer insurance risk. It applies to all entities and all insurance and reinsurance contracts that do not transfer insurance risk except for long-duration life and health insurance contracts. The method used to account for insurance and reinsurance contracts that do not transfer insurance risk is referred to in this proposed SOP as deposit accounting. The proposed SOP does not address when deposit accounting should be applied. This proposed SOP specifies the following: 1. Insurance and reinsurance contracts for which the deposit method is appropriate should be classified as one of the following, which are those: a. That transfer only significant timing risk. b. That transfer only significant underwriting risk. c. That transfer neither significant timing nor underwriting risk. d. With indeterminate risk. 2. At inception, a deposit asset or liability should be recognized for insurance and reinsurance contracts accounted for under deposit accounting and should be measured based on the consideration paid or received less any explicitly identified premiums or fees to be retained by the insurer or reinsurer. 3. Insurance and reinsurance contracts that transfer neither significant timing nor underwriting risk and insurance and reinsurance contracts that transfer only significant timing risk should be accounted for using the interest method. Changes in estimates of the timing or amounts of recoveries should be accounted for by recalculating the effective yield. The asset or liability should then be adjusted to the amount that would have existed had the new effective yield been applied since the inception of the contract. The revenue and expense recorded for such contracts shall be included in interest income or interest expense. 4. Insurance or reinsurance contracts that transfer only significant underwriting risk should be accounted for by measuring the deposit based on the unexpired portion of the coverage provided until losses are incurred that will be reimbursed under the contracts. Once a loss is incurred that will be reimbursed under this kind of contract, the deposit should be measured by the present value of the expected future cash flows arising from the contract plus the remaining unexpired portion of the coverage provided. Changes in the recorded amount of the deposit, other than the unexpired portion of the coverage provided, should be included in the income statement of the insured as an offset against the loss recorded by the insured that will be reimbursed under the contract and in an insurer's income statement as an incurred loss. The reduction in the deposit related to the unexpired portion of the coverage provided should be recorded by the insured and the insurer who are insurance enterprises as an adjustment to incurred losses. If the insured and the insurer are enterprises other than insurance enterprises, the reduction in the deposit related to the unexpired portion of the coverage provided should be recorded as an expense. 5. For insurance and reinsurance contracts with indeterminate risk, the guidance in SOP 92-5, Accounting for Foreign Property and Liability Reinsurance, as to the open-year method, should be followed. The open-year method should not, however, be used to defer losses that otherwise would be recognized pursuant to FASB Statement No. 5. Under the open-year method, the effects of the contracts are not included in the determination of net income until sufficient information becomes available to reasonably estimate and allocate premiums. The open-year method requires that these effects be aggregated in the balance sheet. When sufficient information becomes available to reasonably estimate and allocate premiums, the insurance or reinsurance contract with indeterminate risk should be reclassified into one of the other three categories as an insurance or reinsurance contract that transfers neither significant timing nor underwriting risk, transfers only significant timing risk, or transfers only significant underwriting risk, as appropriate, and accounted for accordingly. This proposed SOP is effective for financial statements for fiscal years beginning after December 15, 1998, with earlier adoption encouraged. Restatement of previously issued annual financial statements would not be permitted. Initial application of this proposed SOP should be as of the beginning of an entity's fiscal year (that is, if the proposed SOP were adopted before the effective date and during an interim period, all prior interim periods would be required to be restated). The effect of initially adopting this SOP should be reported as a cumulative effect of a change in accounting principle (in accordance with the provisions of Accounting Principles Board Opinion No. 20, Accounting Changes).

ISBN

ed97-06-30t

Publication Date

1997

Relational Format

Book

Keywords

Insurance premiums -- Accounting -- Standards -- United States; Insurance -- Accounting -- Standards; Reinsurance -- 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), 1997, June 30

Proposed statement of position : deposit accounting : accounting for insurance and reinsurance contracts that do not transfer insurance risk;Deposit accounting : accounting for insurance and reinsurance contracts that do not transfer insurance risk

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