The European CFO Forum, which represents 21 of Europe’s largest insurance companies, recently presented to the IASB alternative proposals for accounting for participating contracts. The Forum believes that the 2013 IASB Exposure Draft, Insurance Contracts, and redeliberations about that ED do not provide an appropriate basis to explain to investors about the performance of an insurance business, nor do they adequately reflect the nature of long-term insurance contracts, particularly participating contracts. The alternative proposals that the Forum developed include several key principles, which the Forum believes are interconnected and should be considered together as an integrated package:
- Scope: Applicable to all participating contracts, i.e., contracts that give policyholders a right to receive, as a supplement to the guaranteed benefits, a variable return either contractually or at the discretion of the issuer;
- Full unlocking of the contractual service margin (CSM): Unlocked for all assumption changes that affect expected future profits and that relate to future services, including reinvestment assumptions. The components of the CSM and how the CSM develops over the reporting period would be disclosed;
- Release of the CSM: Represents unearned profit, including projected future allocation of asset returns, at initial recognition and throughout the life of the contract. CSM is released as the contract is fulfilled and services are provided. Service driver(s) for the release depend on the nature of services provided by the contract;
- Presentation of interest expense in profit or loss: Underlying assets are classified as (1) amortized cost, fair value through other comprehensive income (OCI), or subject to a mixed measurement model, determined using current portfolio book yield or (2) fair value through profit or loss, determined using the current discount rate used to measure the insurance contract liability;
- Single measurement basis: Cash flows from options and guarantees are treated consistent with all other elements of the insurance contract liability. A single yield curve is applied to all cash flows, i.e., no need to bifurcate cash flows; and
- Non-mandatory use of OCI: Accounting policy choice to present the effect of changes in the discount rate in OCI or in profit or loss.
The Forum presented its proposals to the IASB at an education session and, although the Board asked the representatives from the Forum a number of questions about the alternative proposals, the IASB did not reach decisions nor did it direct its staff how to proceed. The IASB is expected to decide about the accounting for contracts with participating features as a whole in a future meeting.