United States

Changes to revenue recognition impacting insurance entities

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In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance that will, upon its effective date, replace most pre-existing revenue recognition guidance, including industry-specific guidance, in current U.S. generally accepted accounting principles (GAAP). Implementation of the new guidance must occur no later than the quarter and year beginning January 1, 2018, for public entities (i.e., public business entities and certain not-for-profit entities and employee benefit plans) with a calendar year end. For all other entities with a calendar year end, implementation must occur no later than the year ending December 31, 2019.

While the new guidance replaces most existing industry-specific revenue recognition guidance in U.S. GAAP, it does not replace the guidance applicable to insurance entities in Topic 944, “Financial Services—Insurance,” of the FASB’s Accounting Standards Codification. Accordingly, most risk-bearing insurance entities are scoped out of the new guidance. However, upon its effective date, the revenue recognition guidance previously applied by non-risk bearing entities (and risk-bearing entities for non-risk bearing activities) in the insurance sector (e.g., third-party administrators, agents, brokers) will be superseded. Application of the new guidance by these entities could significantly affect the timing and amount of revenue recognized, depending on their business models and previous accounting policies. In our white paper, Changes to revenue recognition impacting insurance entities, we discuss how the accounting for multiple-deliverable arrangements, performance bonuses, penalties and contingent payments and costs related to customer contracts is impacted by the new guidance.

While the FASB provided delayed effective dates for the new guidance, it was with the understanding its implementation would be a significant undertaking for many (if not most) entities. With almost three years having passed since initial issuance of the new guidance, entities should be well on their way to assessing how it will affect their revenue recognition policies and disclosures and developing an implementation plan. This is particularly true for public entities, those entities that plan on electing the full retrospective transition method and those entities that have multi-year contract terms with their customers.

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