The Financial Accounting Standards Board (FASB) issued last Friday FASB Statement No. 163 or the standard called Accounting for Financial Guarantee Insurance Contracts. This new standard clarifies how FASB Statement No. 60 or Accounting and Reporting by Insurance Enterprises applies to financial guarantee insurance contracts issued by insurance companies. This includes the recognition and measurement of premium revenue and claim liabilities.
It also requires expanded disclosures about financial guarantee insurance contracts. The Statement is effective for financial statements issued for fiscal years starting after December 15, 2008, as well as all interim periods within those fiscal years, except for disclosures about the insurance enterprises risk-management activities. Disclosures regarding the insurance enterprises risk-management activities are effective the first period starting after issuance of the Statement.
By issuing Statement 163, the FASB has taken a major step toward ending inconsistencies in practice that have made it difficult for investors to receive comparable information about an insurance enterprises claim liabilities, said FASB Project Manager Mark Trench. Its issuance is particularly timely in light of recent concerns about the financial health of financial guarantee insurers, and will help bring about much needed transparency and comparability to financial statements.
The accounting and disclosure requirements of Statement 163 are aimed at improving the comparability and quality of information provided to users of financial statements by creating consistency, for instance, in the measurement and recognition of claim liabilities, according to FASB.
The Statement 163 requires that an insurance company recognize a claim liability before an event of default or insured event when there is evidence that credit deterioration has occurred in an insured financial obligation. It requires disclosure about the risk-management activities used by an insurance firm to evaluate credit deterioration in its insured financial obligations and the insurance enterprises surveillance or watch list.