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FAS97: Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments

Issued: Dec 1987

Superseded by: ASC

Summary

Scope:

  • For universal life-type contracts that were not addressed by FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises.
  • For limited-payment long-duration insurance contracts and investment contracts and amends Statement 60 to change the reporting of realized gains and losses on investments.

 

Applicability:

{US-FAS97-6}

  • Investment contracts,
    • Long-duration contracts that do not subject the insurance enterprise to risks arising from policyholder mortality or morbidity. {US-FAS97-7}
  • Limited-payment contracts,
    • Long-duration insurance contracts with terms that are fixed and guaranteed, and for which premiums are paid over a period shorter than the period over which benefits are provided. {US-FAS97-9}
  • Universal life-type contracts
    • long-duration insurance contracts with terms that are not fixed and guaranteed. {US-FAS97-10}
      Universal life-type contracts include contracts that provide either death or annuity benefits and are characterized by any one of the following features:
      • One or more of the amounts assessed by the insurer against the policyholder that are not fixed and guaranteed by the terms of the contract.
        1. mortality coverage
        2. contract administration
        3. initiation
        4. surrender
      • Amounts that accrue to the benefit of the policyholder that are not fixed and guaranteed by the terms of the contract.
        1. interest accrued to policyholder balances
      • Varied premiums.
    • Participating contracts with the following features are regarded as universal life-type contracts: {US-FAS97-12}
      1. Varied premium payments
      2. A stated account balance to be credited based on assessment that are not fixed and guaranteed
      3. Contract elements change in response to market conditions instead of experience study
    • Nonguaranteed-premium contract with the following features are regarded as universal life-type contracts: {US-FAS97-13}
      • Same as the criteria of [2] and [3] in participating contracts above.

Standards of Financial Accounting and Reporting

Types of Cash Flows

  1. Amounts assessed that represent compensation to the insurer for services to be provided in future periods. {US-FAS97-20}
    • On Income Statement: No.
      • They are not earned in the period assessed.
    • On Balance Sheet: Yes.
      • They shall be reported as unearned revenue and recognized in income over the period benefited.
      • Amortized with the factors used to amortize capitalized acquisition costs (DAC k-factor).
  2. Amounts that may be assessed against policyholders in future periods. {US-FAS97-18}
    • On Income Statement: Yes.
    • On Balance Sheet: No.
      • They shall not be anticipated in determining the liability for policy benefits.
  3. Payments to policyholders that represent a return of policyholder balances. {US-FAS97-21}
    • On Income Statement: No.
      • Not to be reported as expenses.
      • Only benefit claims in excess of the related policyholder balances are reported.
    • On Balance Sheet: Yes.

US-FAS97-1

Revenue Recognition

  Investment Contracts Limited-Payment Contracts Universal Life-Type Contracts
Premium

Shall not be reported as revenues.

Income Expense
0

(-) DAC, GOE

(-) Δ res
Asset Liability
(+) interest-bearing, or other financial instruments (+) liabilities

{US-FAS97-15}

Gross premium received in excess of the net premium should be deferred.

Income Expense

(+) net premium

(-) DAC, GOE

(-) Δ res
Asset Liability
(+) financial instruments

(+) res = PV of (gross premium – net premium)

{US-FAS97-16}

Shall not be reported as revenues.

Income Expense
0

(-) DAC, GOE

(-) Δ res

{US-FAS97-19}

Asset Liability
(+) financial instruments (+) account value
(+) policy benefits
(+) refunds on contract termination
(+) premium deficiency

{US-FAS97-16}
Surrender Charge – –

Type: Amounts assessed that represent compensation to the insurer for services to be provided in future periods.

Recognition:

  • Income Statement: in the net cash flows
  • Balance Sheet: not in the cash flows of reserve calculation

{US-FAS97-18}
Persistency Bonus – –

Type: Payments to policyholders that represent a return of policyholder balances

Recognition:

  • Income Statement: not reported as expenses
Amortization of DAC – –

DAC AMORT = PV of EGP * DAC k-Factor

  • EGP is floored to be strictly > 0
  • DAC k-factor is constant (determined at point-of-sale)

{US-FAS97-22}
Premium Deficiency –

Reserve for Premium deficiency = – ([a] – [b])+ + DAC

[a] Present value of future payments for benefits and related settlement and maintenance costs, determined using revised assumptions based on actual and anticipated experience.

[b] the present value of future gross premiums, determined using revised assumptions based on actual and anticipated experience.

{US-FAS97-27},  {US-FAS60-35}

 

Estimated Gross Profit

EGP Components – –

EGP = COI – Benefit Outgoes (in excess of account value)
         + (admin fee – admin cost)
         + (investment return – interest credited)
         + surrender charges
         + other expected assessments and credits

  • under BEA
  • no PAD is added

{US-FAS97-23}
EGP Adjustments – –
  • Total amortization shall be adjusted by actual experience (after grossed up account value).

{US-FAS97-25}