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FASB ED's on fair value for GIC, reinsurance contracts; offsetting interpretation.

The Financial Accounting Standards Board issued exposure drafts on fair value for guaranteed investment contracts (GICs) and on accounting for reinsurance contracts as well as an interpretation about offsetting amounts related to specific contracts.

The ED Reporting by Defined Benefit Pension Plans of Investment Contracts would require such plans to account at fair value for GICs issued by insurance companies or for similar contracts issued by entities such as banks or thrifts. The proposal would become effective in calendar year 1993.

FASB Statement no. 35, Accounting and Reporting by Defined Benefit Pension Plans, requires that plan investments, except for contracts with insurance companies, be reported at fair value. In practice, the exception to fair value reporting has been applied, by analogy, to similar contracts issued by financial institutions other than insurance companies. The ED would amend Statement no. 35 to require all investment contracts to be reported at fair value.

Comments on the ED are due by June 18.

Reinsurance contracts. The ED Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts addresses inconsistencies between accounting for reinsurance and the general criteria for offsetting. It amends FASB Statement no. 60, Accounting and Reporting by Insurance Enterprises, by requiring that reinsurance receivables and unearned premiums paid to the reinsurer be reported as assets. Reinsurance receivables would include amounts related to incurred-but-not-reported claims and liabilities for future policy benefits. Estimated receivables would be recognized in a manner consistent with the related liabilities.

The ED also would establish the conditions required for a contract with a reinsurer to qualify for reinsurance accounting. Contracts that do not result in the possibility that the reinsurer may realize significant gain or loss from the insurance risk assumed would be accounted for as deposits.

Companies entering into reinsurance contracts would be required to disclose the nature and effect of reinsurance transactions, including the premium amounts of reinsurance assumed and ceded.

Moreover, the ED would require disclosure of concentrations of credit risk associated with reinsurance receivables and prepaid reinsurance premiums under the provisions of FASB Statement no. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk.

If adopted, the ED would be effective for calendar year 1993 financial statements. Comments are due by June 30.

Offsetting. FASB Interpretation no. 39, Offsetting of Amounts Related to Certain Contracts, clarifies the circumstances under which amounts recognized for individual contracts may be offset against amounts recognized for other contracts and reported as a net amount on the balance sheet.

Generally accepted accounting principles prohibit offsetting assets and liabilities unless the right of setoff exists. The interpretation reiterates what conditions must be met to have that right and addresses the applicability of the general principle to contracts such as forwards, interest-rate swaps, currency swaps, options and other conditional or exchange contracts. It also clarifies when amounts recognized for those contracts may be offset in the balance sheet.

Additionally, the interpretation permits offsetting of fair value amounts recognized for multiple-forward, swap, option and other conditional or exchange contracts that are executed with the same counterparty under a master-netting arrangement.

The interpretation will be effective for financial statements issued for periods beginning after December 15, 1993.

One copy of each document is available at no cost from the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116.
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Title Annotation:exposure drafts, guaranteed investment contracts
Publication:Journal of Accountancy
Date:Jun 1, 1992
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