Credit card origination costs, present value of future profits and estimated mine worker benefit payments.
This month's column lists 1992 and 1993 EITF consensuses adopted from November 19, 1992, through March 16, 1993 (see the sidebar on page 102). In addition, three of the consensuses are summarized: credit card origination costs, accounting for the present value of future profits resulting from the acquisition of a life insurance company and accounting for estimated payments required by the Coal Industry J?etiree Health Benefit Act of 1992. The sitmmayies are presented in order of importance of applicability.
EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.
ISSUE NO. 92-5
Issue no. 92-5, Amortizatiotz Period for Net Deferred Credit Card Origination Costs, affects enterprises that issue credit cards (credit cards, debit cards, bank charge cards and other similar cards). Credit card issuers often incur direct loan origination costs (as defined in paragraph 6 of FASB Statement no. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases) and may charge cardholders an origination fee in connection with the issuance of a credit card and periodic renewal fees for the continued extension of credit card privileges. Some task force members noted costs incurred to build customer relationships typically are expensed as they are incurred.
The issue is the proper amortization period for qualified deferred credit card origination costs of cards with fees (including credit cards with fees waived for a limited time period) and without fees. This issue does not address
* Accounting for credit card origination costs related to the issuance of private label credit cards by an enterprise for the purchase of its own goods or services on its own premises.
* Amortization of a premium paid when an enterprise purchases a credit card portfolio from third parties (see Issue no. 88-20, Difference between Initial Investment and Principal Amount of Loans in a Purchased Credit Card Portfolio).
* Costs of acquiring individual credit card accounts from a third-party originator (see Issue no. 93-1, Accounting for Individual Credit Card Acquisitions, which was pending at this writing).
The EITF reached a consensus that credit card origination costs that qualify for deferrat under paragraph 6 of FASB Statement no. 91 should be netted against the related credit card fee, if any, an the net amount should be amortized on a straight-line basis over the privilege period. The length of this period depends On whether fee is charged. Significance for this purpose is determined based on the amount of the fee relative to the related costs.) If a significant fee is charged, the privilege period is the period the cardholder. is entitled to use the credit card. If there is no significant fee, the privilege period is one year.
In addition, the EITF reached a consensus that, for credit card fees and costs for both purchased and originated credit cards, all entity should disclose its accounting policy, the net amount capitalized at the balance sheet date and the amortization period(s).
ISSUE NO. 92-9
Issue no. 92-9, Accounting for the Present Value of Future Profits Resulting from the Acquisition a Life Insurance Company, applies to an enterprise that acquires a life insurance company in a purchase accounting transaction under Accounting Principles Board Opinion no. 16, Business Combinations. At the acquisition date, the enterprise recognizes an asset for the present value of future profits (PVP), representing the present value of estimated net cash flows embedded in the existing contracts acquired. PVP may relate to traditional life insurance contracts covered by FASB Statement no. 60, Accounting and Reporting by Insurance Enterprises, or other long-duration contracts covered by FASB Statement no. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-duration Contracts and for Realized Gains and Losses from the sale of Investments.
An actuary typically determines the initial value of PVP using premiums as a measurement base for FASB Statement no. 60 contracts and future gross profits as a measurement base for FASB statement no. 97 contracts. The issues are
1 . Whether accrued interest should be recognized on the unamortized PVP balance.
2. What discount rate should be used for measuring amortization of PVP.
3. How changes in estimates of future gross profits should he reflected.
4. How impairment of the PVP asset should be periodically assessed.
Recognition of accrued interest. The EITF observed that industry practice is to amortize PVP using an interest method with accrual of interest added to the unamortized balance. It also observed that this practice is similar to accounting for deferred policy acquisition costs under FASB Statements nos. 60 and 97.
Discount rate. The EITF reached a consensus that the inter used to amortize PVP should be the liability or contract rate to be consistent with FASB Statements nos. 60 and 97.
Changes in estimates. The EITF reached a consensus that changes in estimates of future gross profits on FASB Statement no. 97 contracts should be accounted for as a catch-up adjustment. However, changes in estimates of future premiums on FASB Statement no. 60 contracts woud not affect the amortization of FVP beyond that needed to reflect current deaths and surrenders.
Impairment. The EITF reached a consensus that PVP and any related liability should be subject to the premium deficiency test required in FASB Statements nos. 60 and 97.
Effective date. The EITF also issued special guidance regarding the effective date of these consensuses. The premium deficiency test should be applied in periods after November 19, 1992 the date of this consensus), to PVP assets arising from acquisitions of life insurance companies occurrinng before that date. The other consensuses may be applied prospectively to PVP assets arising f:rom acquisitions of life insurance companies occurring after November 19, 1992.
The SEC staff requires certain disclosures of PVP assets be made in filings with the commission. (See EITF Abstracts for details.)
ISSUE NO. 92-13
Issue no. 92-13, Accounting for Estimated Payments in Connection with the Coal Industry Retiree Health Benefit Act of 1992, arose in response to the aforementioned legislation that created a "multiemployer benefit plan" called the United Mine workers of America Combined Fund (the combined fund) to provide medical and dental benefits to certain beneficiaries of previously established trusts that have current and projected operating deficits. All beneficiaries receiving benefits from the previous trusts as of July 20, 1992, are eligible to receive benefits from the combined fund beginning this year.
The act provides for assignment of beneficiaries to former employers and the allocation of unassigned beneficiaries (orphans) to existing employers. The act requires that the funding of these benefits come from assessments against former signatories or persons related to them) to an old coal wage agreement. Some companies under the act may have ceased coal operations.
The issue is how an enterprise should account for the payments that are required by the act.
The EITF reached a consensus that companies that currently have operations in the coal industry are permitted to account for their obligation under the act either as participation in a multiemployer plan or as a contingent loss in accordance with FASB Statement no. 5, Accounting for Contingencies, from a plan adjustment. Companies that no longer have operations in the coal industry should account for their entire obligation as a loss under FASB Statement no. 5. Any company reporting under FASB Statement no. 5 should report the loss as an extraordinary item.
EITF Abstracts provides the required disclosures and guidance on this accounting change's effects on the adoption of FASB Statement no. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
* EITF Issue no. 92-5
Accounting problem: May deferred credit card origination costs, as defined, be netted against the related credit card fee, if any, and the net amount amortized on a straight-line basis over the privilege period? Consensus: Yes.
* EITF Issue no. 92-9
Accounting problem: (1) Should changes in estimates Of future gross products that are the basis of amortizing the present value of future profits (PVP) of acquired long-duration insurance contracts be accounted for as a catch-up adjustment? (2) Should the PVP and any related liability be subject to the premium deficiency test required by FASB Statements nos. 60 and 97? Consensus: (1) Yes. (2) Yes.
* EITF Issue no. 92-13
Accounting problem: (1) Should companies that currently have operations in the coal industry account for estimated payments for postretirement health and dental benefits arising from the Coal Industry Retiree Health Benefit Act of 1992 either as participation in a multiemployer plan or as a contingent loss? (2) Should companies no longer in the coal industry account for this obligation as a contingent loss? Consensus: (1) Yes. (2) Yes.
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|Author:||Volkert, Linda A.|
|Publication:||Journal of Accountancy|
|Date:||May 1, 1993|
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