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FASB, AICPA address mutual life insurance company contracts.

The Financial Accounting Standards Board and the American Institute of CPAs have issued statements concerning the ways mutual life insurance companies should account for and report certain contracts. Both statements are effective for fiscal years that begin after December 15, 1995. Journal news editor Selma Friedman describes these two new standards.

FASB Statement no. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts, applies to mutual life insurance enterprises, assessment enterprises and fraternal benefit societies, all of which are referred to as mutual life insurance enterprises. It subjects these enterprises to the requirements of FASB Statement no. 60, Accounting and Reporting by Insurance Enterprises; 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; and Statement no. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts. Mutual life insurance enterprises had previously been exempt from these standards.

Because of the lack of accounting guidance for the insurance and reinsurance activities of mutual life insurance enterprises, the FASB had asked the AICPA to reactivate and complete its project on that issue. The decision to extend the guidance in Statement no. 120 to the board's three earlier statements was made as a result of these discussions.

Statement no. 120 also changes the effective date of FASB Interpretation no. 40, Applicability of Generally Accepted Accounting Principles to Mutual Life Insurance

and Other Enterprises, to fiscal years beginning after December, 15, 1995. It does not change the interpretation's disclosure and other transition provisions.

"Until now, mutual life insurance companies have reported financial information to policyholders and creditors on a statutory basis that is prescribed by state insurance regulators," said FASB practice fellow Kevin Mead. Statement no. 120 and AICPA Statement of Position 95-1, Accounting for Certain Activities of Mutual Life Insurance Enterprises, establish how those companies must report insurance and reinsurance activities in accordance with GAAP.

AICPA SOP 95-1 provides accounting guidance for participating insurance contracts of mutual life insurance enterprises with the following characteristics:

* They are long-duration participating contracts that are expected to pay policyholders dividends based on actual experience of the insurance enterprise.

* Annual policyholder dividends are paid in a manner that identifies divisible surplus and distributes it in approximately the same proportion as the contracts are considered to have contributed to divisible surplus the "contribution principle").

SOP 95-1 refers to FASB Statement nos. 60, 97, 113 and 120 and notes they should be applied to the contracts not covered by this SOP.

To order copies of FASB Statement no. 120 (product code no. S120), priced at $11 each, write to Order Department, Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116, or call the FASB at (203) 847-0700, ext. 555.

To order copies of AICPA SOP 95-1 (product no. 014889JA, priced at $8 each for members and $9 each for nonmembers), call the AICPA order department at (800) 862-4272 (department 1).

The two standards also can be found in the April 1995 Journal on pages 107 (SOP 95-1) and 114 (Statement no. 120).
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Title Annotation:Financial Accounting Standards Board, American Institute of Certified Public Accountants
Author:Friedman, Selma
Publication:Journal of Accountancy
Date:May 1, 1995
Words:522
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