Hello again and thank you for addressing this question to me.
The answer here has a lot in common with the answer to your previous
question.
Accounting, GAAP and IAS
https://www.answers.google.com/answers/main?cmd=threadview&id=57697
The "installment contract receivable" that you describe is in fact a
series of insurance premiums that the company will receive in the
future if and when the purchaser pays them. And pursuant to Statement
No. 60, "[p]remiums from long-duration contracts are recognized as
revenue when due from policyholders."
Summary of Statement No. 60 Accounting and Reporting by Insurance
Enterprises
http://www.fasb.org/st/summary/stsum60.shtml
Again, the full text of Statement No. 60 can be purchased online:
Full text of FASB Statements and other publications
http://stores.yahoo.com/fasbpubs/
And as discussed in my previous answer, FASB has issued a Preliminary
Views Document on Reporting Financial Instruments and Certain Related
Assets and Liabilities at Fair Value. A FASB staff member has
published an article explaining how the above requirement will have to
change if the "fair value" concept is to be applied to insurance
contracts:
[Current Requirement]
"Premiums from long-duration contracts are recognized as revenue when
due from policyholders."
[Application of Preliminary Views]
"The contract represents a conditional obligation to pay, which is a
financial instrument. Some contracts have other features such as
policy loans and cash surrender values, but those features do not
change the contracts' status as financial instruments. When the policy
becomes effective, a contract liability would be recognized and
measured initially and subsequently at fair value. (Again, fair value
would be the amount that another insurer with the same credit standing
as the policy issuer would charge to assume the policy liability. That
might be different from the entry cost to the policyholder, and, if
so, the policy issuer would recognize a gain or loss when the policy
is issued.) The income statement would reflect the effects of changes
in fair value in the period in which changes occur."
Relevance of Fair Vale Information for Financial Instruments
http://www.fasb.org/draft/pvfvalu2.pdf
[The material quoted above appears on page 26 of this Adobe Acrobat
file]
But again, since GAAP has not been amended to adopt the Fair Value
concept, the asset that you describe is only recognized "when due."
Search terms used:
FASB statement 60
Please be sure to Request Clarification is you need anything further
in connection with this answer.
Sincerely,
richard-ga |
Clarification of Answer by
richard-ga
on
27 Aug 2002 15:12 PDT
Hello again:
I'm glad I included information on "fair value" in my prior answers,
because that turns out to be the IAS approach.
An IASC Steering Committee prepared a Draft Statement of Principles
(DSOP) that was approved for transmission to the Board in June 2001.
http://www.iasc.org.uk/cmt/0001.asp?s=200254&sc={259F34C2-D964-11D5-BE6E-003048110251}&n=1001#DSOP
[If this link does not work for you, you'll have to go to
http://www.iasplus.com/agenda/insure.htm
and follow the link on that page titled "IASB's Website."]
Chapter 9 of this document describes how future premiums and contract
liabilities will have to be reported under IAS. I will not quote it at
length here, because it is copyrighted and also because I cannot
easily copy and paste from the Adobe Acrobat document. I suggest you
read it yourself.
Here are how two commentators summarize the IAS approach to these
items:
1. "At the heart of the proposed standards is the concept of fair
value--or a 'fair value like'-- measurement of financial assets and
liabilities. Some observers believe the movement of global capital
markets to a fair-value standard will eventually force U.S. GAAP to
follow."
IAS: Some Pain, Much Gain for Insurers
http://www.ey.com/global/content.nsf/International/International_Accounting_Standards:_Some_Pain_-_Much_Gain_for_Insurers
2. "The DSoP discusses the treatment of future premiums in some
detail, and concludes that future premiums should be included only to
the extent that:
-their inclusion would increase the insurer’s liability, or
-the option to renew is potentially valuable to the policyholder."
Getting to grips with fair value
http://www.watsonwyatt.com/europe/pubs/insurancefinancial/articles/2002_05r.asp?ID=9977
I hope this information is useful to you.
By the way, here's how timely your question is:
The IASB and the FASB are scheduled to meet in joint session to
discuss financial reporting of insurance contracts. Can you be in
Norwalk, Connecticut on Friday morning, September 20? The meeting is
open to the public.
http://www.iasb.org.uk/cmt/0001.asp?s=1148519&sc={FD9DA313-E863-44E6-83B5-A14736FC680E}&n=1027
Sincerely,
richard-ga
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