New Rules for Long-Term Insurance Need Fixes for Embedded Derivatives, Insurance Sector Says
Insurance companies are finding it tougher to account for embedded derivatives within certain transactions because of new rules for reporting long-term insurance contracts, insurance sector advocates told FASB. The American Council of Life Insurers said in an October 13 letter that the board should add a project to reduce complexity in insurance and derivatives accounting rules related to equity-indexed annuity contracts and reinsurance. Specifically, insurance companies are running into problems with accounting related to equity-indexed annuity and equity-indexed universal life reserving. These are general account products that offer policyholders a contingent return based on the performance of a specified external index (typically the S&P 500). These contracts have often been perceived to include a feature referred to as forward-starting options. At issue is whether the forward-starting options “associated with index-crediting periods beyond the current index-crediting period” should be considered in the application of Accounting Standards Codification (ASC) Topic 815 to these contracts.
Volume Three of IFRS Interpretations Committee Decisions Published
The IFRS Foundation has published the IFRS Interpretations Committee’s (IFRIC) recent conclusions on issues companies raised when applying accounting rules for leases, income taxes, and intangible assets. The document, “Compilation of Agenda Decisions—Volume 3 Published by the IFRS Interpretations Committee April 2020–September 2020,” provides IFRIC’s views on the following topics:
- A sale and leaseback transaction with variable payments under IFRS 16, Leases: how (in certain types of transactions) a seller-lessee measures a right-of-use asset arising from the leaseback, and thus determines the amount of any gain recognized at the date of the transaction.
- Multiple tax consequences of recovering an asset under IAS 12, Income Taxes: how an entity determines the tax base of the asset and, consequently recognizes and measures deferred tax. Second, how an entity, in its consolidated financial statements, accounts for deferred taxes related to its investment in a subsidiary.
- Player transfer payments under IAS 38, Intangible Assets: whether the entity recognizes the transfer payment received as revenue, applying IFRS 15, Revenue from Contracts with Customers, or instead recognizes the gain or loss arising from the derecognition of the intangible asset in profit or loss, applying IAS 38.
In all three areas, IFRIC had concluded that the principles and requirements in the accounting standards provide an adequate basis for a company to determine, at the date of the transaction, the accounting for the issues raised. Consequently, the Committee decided not to add the topics to its standard-setting agenda.
Brown Calls Revised Agenda ‘Tragic Mistake’
PCAOB member Jay Brown said he does not support the board’s recently revised standards-setting and research agendas because investors’ views are largely ignored. “This is a tragic mistake,” Brown said in a statement issued on October 13, adding that the updated agendas do not reflect the goals laid out in the 2018 Strategic Plan, which commits the PCAOB to consider investors’ expectations. His rebuke is especially poignant since the board’s sole mission is to protect investors and the public interest. “The result will be less trust in our system of financial reporting, an outcome that harms our capital markets,” Brown said. In early September, the PCAOB dropped the auditor’s role on “other information” and non-compliance with laws and regulation (NOCLAR) from its research agenda and going concern from the standards-setting agenda. The board said going forward, it will include only the projects that it believes will have a public milestone in the next 12 to 18 months.