Academic journal article Journal of Accountancy

FASB ED's on Fair Value for GIC, Reinsurance Contracts; Offsetting Interpretation

Academic journal article Journal of Accountancy

FASB ED's on Fair Value for GIC, Reinsurance Contracts; Offsetting Interpretation

Article excerpt

The Financial Accounting Standards Board issued exposure drafts on fair value for guaranteed investment contracts (GICs) and on accounting for reinsurance contracts as well as an interpretation about offsetting amounts related to specific contracts.

The ED Reporting by Defined Benefit Pension Plans of Investment Contracts would require such plans to account at fair value for GICs issued by insurance companies or for similar contracts issued by entities such as banks or thrifts. The proposal would become effective in calendar year 1993.

FASB Statement no. 35, Accounting and Reporting by Defined Benefit Pension Plans, requires that plan investments, except for contracts with insurance companies, be reported at fair value. In practice, the exception to fair value reporting has been applied, by analogy, to similar contracts issued by financial institutions other than insurance companies. The ED would amend Statement no. 35 to require all investment contracts to be reported at fair value.

Comments on the ED are due by June 18.

Reinsurance contracts. The ED Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts addresses inconsistencies between accounting for reinsurance and the general criteria for offsetting. It amends FASB Statement no. 60, Accounting and Reporting by Insurance Enterprises, by requiring that reinsurance receivables and unearned premiums paid to the reinsurer be reported as assets. Reinsurance receivables would include amounts related to incurred-but-not-reported claims and liabilities for future policy benefits. Estimated receivables would be recognized in a manner consistent with the related liabilities.

The ED also would establish the conditions required for a contract with a reinsurer to qualify for reinsurance accounting. Contracts that do not result in the possibility that the reinsurer may realize significant gain or loss from the insurance risk assumed would be accounted for as deposits. …

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