There has been diversity in the way financial guarantee insurance contracts were accounted for by insurance enterprises under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises. That diversity resulted in differences in the recognition and measurement of claim liabilities and led to different financial statement information for similar transactions. The Financial Accounting Standards Board (FASB) therefore has issued FASB Statement No. 163, Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60, to provide consistency in accounting for financial guarantee insurance contracts.
Statement No 163 clarifies how Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities. The Statement requires an insurance enterprise to recognize a liability for the unearned premium revenue at the inception of the financial guarantee insurance contract. The measure of the unearned premium revenue includes the present value of any premiums due in future periods. The unearned premium revenue is recognized as revenue in income over the period of the contract in proportion to the amount of insurance protection provided. The Statement requires recognition of a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. The claim liability is to be measured in an amount equal to the present value of the expected net cash outflows to be paid under the insurance contract discounted using a current risk-free rate.
Statement No. 163 also requires expanded disclosures about financial guarantee insurance contracts. The objective of the disclosures is to enable financial statement users to understand the factors affecting the present and future recognition and measurement of financial guarantee insurance contracts. Those disclosures generally include (a) information about premiums receivable and the related premium revenue, (b) information about claim liabilities, and (c) a description of the risk-management activities used to track and monitor deteriorating insured financial obligations.
Statement No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for disclosures about the insurance enterprise’s risk-management activities. Disclosures about the insurance enterprise’s risk-management activities are effective the first period (including interim periods) beginning after May 23, 2008. The decision by the FASB to require immediate disclosure about the insurance enterprise’s risk-management activities is directly related to the current state of the credit markets.
The Statement is available in full at http://www.fasb.org/pdf/fas163.pdf.
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