Academic journal article Journal of Accountancy

Official Releases: SOP 05-1 ... Ethics Interpretation and Rulings

Academic journal article Journal of Accountancy

Official Releases: SOP 05-1 ... Ethics Interpretation and Rulings

Article excerpt

Space considerations prevent publishing here the appendix to SOP 05-1. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 05-1 (Product no. 014943), contact the AICPA order department at 888-777-7077.

SOP 05-1--Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts

NOTE

Statements of Position on accounting issues present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, as amended, identifies AICPA Statements of Position that have been cleared by the Financial Accounting Standards Board as sources of established accounting principles in category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA members should consider the accounting principles in Statement of Position if a different accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by the Statement of Position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

TABLE OF CONTENTS

Summary
Foreword
Introduction and Background
Applicability and Scope
Conclusions
  Internal Replacements
  Integrated and Nonintegrated Contract Features
  Contract Modifications Involving Nonintegrated
  Contract Features
  Contract Modifications Involving Integrated
  Contract Features
  Determining Substantial Changes
  Accounting for Contracts That Are Substantially
   Unchanged
  Accounting for Contracts That Are Substantially
   Changed
  Contract Assessments Related to Internal Replacements
   of Long-Duration Contracts
  Recoverability
  Disclosures
Effective Date and Transition
  Internal Replacements Occurring Prior to
    the Year of Adoption
  Internal Replacements Occurring After the
    Date of Adoption
Disclosures
APPENDIX A Background and Basis for
 Conclusions
APPENDIX B Application of Statement of
 Position--Product and Product Feature Examples
APPENDIX C Flowchart--Application of
 SOP 05-1 Accounting Model
APPENDIX D Illustration of Deferred Acquisition
 Costs and Unearned Revenue Liability
 Amortization for a FASB Statement No. 97
 Internal Replacement That Is Determined
 to Result in a Substantially Unchanged Contract
GLOSSARY

SUMMARY

This Statement of Position (SOP) provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments

* The SOP defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. Modifications that result from the election by the contract holder of a benefit, feature, right, or coverage that was within the original contract are not internal replacements subject to this guidance as long as all of the conditions listed in paragraph 9 of this SOP are met.

* The SOP introduces the terms integrated and nonintegrated contract features and specifies that nonintegrated features do not change the base contract and are to be accounted for in a manner similar to a separately issued contract. …

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