United States

Revenue recognition alert for insurers issuing GAAP-based financial statements

Working draft issued with clarification on ASU No. 2014-09

INSIGHT ARTICLE

On Feb. 1, 2017, the American Institute of CPA’s Financial Reporting Executive Committee (FinREC) released, for informal comment, a working draft of accounting issue #9-1 related to insurance entities’ implementation of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which will be included in the Financial Accounting Standards Board (FASB) Codification (ASC) as section 606. The draft was prepared by the AICPA’s Insurance Entities Revenue Recognition Task Force (Task Force), of which Mark Tomaw, RSM US LLP assurance partner, is a member.

The draft, which would only affect insurers that prepare financial statements using generally accepted accounting principles (GAAP), discusses considerations for insurers in applying the scope exception in FASB ASC 606-10-15-2 to contracts within the scope of ASC 944, Financial Services-Insurance. FinREC expects there to be a moderate impact on insurance accounting related to this issue.

Generally, the draft clarifies that most insurance company contracts will fall under the scope exception, reducing the instances when a contract would need to be bifurcated and allowing entities to continue following existing revenue recognition policies. However, if insurers are providing significant administrative-type services, for example, claims adjudication or processing, enrollment, provider network access, wellness benefits, roadside assistance, and safety inspections, insurers will need to review their contracts to determine if the current revenue recognition accounting policy for these types of services complies with the new standard and the implementation guidance.

The Task Force is continuing to review other issues related to implementing ASC 606 for the insurance industry. The most prominent is Issue #9-3, which relates to accounting for third-party extended service warranty contracts within the scope of ASC 606. The primary issue under discussion relates to the period over which the entity is obligated to stand ready to repair or replace an item under warranty and whether that period is (1) the contract period or (2) the period in which the entity is expected to repair or replace the item under warranty. Although there is no timetable for issuance, we can expect the Task Force to develop and submit to FinREC a working draft on Issue #9-3.

Read the working draft of accounting issue #9-1 for more information.

If you have any questions regarding this alert, please contact Mark Tomaw at mark.tomaw@rsmus.com.

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