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Insurance, Leases on Joint Agenda

January 15, 2014

The FASB and IASB plan to use their January joint meeting to discuss their largely converged lease accounting plan and their diverged insurance contracts proposals.The boards do not plan to make decisions on either project but instead will use the discussion to determine next steps.

In addition to the much-watched lease accounting project, the FASB and IASB plan to discuss the insurance contracts project when they meet via videoconference on January 22-23, 2014.

The standard-setters released separate proposals on insurance in June 2013 and do not expect to publish converged accounting standards, but the boards want to review feedback together to see if there are areas where they can find common ground.

The boards are scheduled to discuss the IASB’s comment letters on the international board’s Exposure Draft (ED) No. 2013-7,Insurance Contracts,as well as feedback received through outreach with investors and analysts.Neither board plans to take formal action at this meeting.

The crux of the IASB’s plan and the FASB’s, which was released via Proposed Accounting Standards Update (ASU) No. 2013-290, Insurance Contracts (Topic 834), is the same.The boards want to give investors a clearer look at insurers’ biggest liabilities.But the boards differ on key elements, particularly with how insurers will portray the pattern of profit recognition and reflect changes in the estimates of profits earned on contracts. The boards also differ on some aspects of how to treat long-term insurance policies, such as life insurance products, versus short-term contracts, such as theft and fire.

The IASB’s proposal is the result of more than a decade of work to attempt to write a permanent insurance accounting standard for IFRS. The IASB in 2004 issued IFRS 4, Insurance Contracts,which was supposed to be a temporary measure to define an insurance policy, offer some disclosure requirements, and allow existing regional accounting practices to remain until the IASB wrote a permanent replacement.A decade later, the temporary standard remains a source of frustration for international insurers and analysts.

In contrast, U.S. GAAP has had several product-specific insurance standards in place for decades and many U.S.-based insurance companies say current accounting is not broken, especially for short-term policies.In 2012, the FASB and IASB acknowledged that their differences were so great that they would have to release separate proposals.

The boards also plan to discuss their largely converged lease accounting project. The FASB and IASB want to discuss potential modifications to its two major parts—the accounting model for lessors and the accounting model for lessees—as well as a plan to simplify accounting for small-ticket leases such as printers and photocopiers. This meeting will serve as a brainstorming session and the board does not plan to take formal action, according to the meeting agenda.(See More In-depth Discussion Needed on Leases Project in the January 14, 2014, edition of Accounting & Compliance Alert.)

In addition to the joint discussions, the IASB has several solo meetings planned January 22-23.

The IASB is scheduled to discuss the classification and measurement of financial instruments.This was once a joint project with the FASB, but the odds of convergence faded in December when the FASB rejected one of the key parts of the proposal, which was released via the IASB in November 2012 as ED No. 2012-4, Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments to IFRS  9-2010),and via the FASB in February 2013 as ASU No. 2013-220,Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities.

The IASB plans to discuss the interaction between the classification and measurement proposal and the insurance project, presentation and disclosure requirements, how first-time adopters of IFRS should present comparative information, and other transition issues.

The FASB and IASB also have gone their separate ways on their impairment project, which aims to make banks and other financial businesses recognize losses earlier in the credit cycle. This project was once considered a must-converge effort and a crucial response to the 2008 financial crisis, but the boards could not agree on the best way to make banks recognize these losses.

The differences culminated with the FASB in December 2012, releasing Proposed ASU No. 2012-260,Financial Instruments—Credit Losses (Subtopic 825-15),and the IASB in March releasing ED No. 2013-3, Financial Instruments: Expected Credit Losses.

The IASB plans to discuss presentation and disclosure requirements in its proposal.

The international board also plans to holder shorter meetings to discuss IFRS Interpretations Committee issues and potential amendments to IAS 1, Presentation of Financial Statements.