FAS 120

from Wikipedia, the free encyclopedia

FAS 120 , official Statement of Financial Accounting Standards No. 120 , denotes an accounting standard issued by the US Financial Accounting Standards Board that deals with the accounting of insurance contracts. This US GAAP standard is also of interest to non-US insurance companies, provided their shares are listed on a US stock exchange or they apply US GAAP in the context of an IFRS financial statement in accordance with IFRS 4 . FAS 120 is an extension of the FAS 60 , FAS 97 and FAS 113 standards .

background

In June 1982, FAS 60 was the first independent accounting standard for insurance contracts. With the publication of FAS 97 in December 1987, the procedure was specified for certain types of contract, in particular contracts with shortened premium payment periods and universal life policies. After the AICPA published a Statement of Position (SOP) on accounting for mutual life companies , the FASB issued FAS 120 in January 1995, which adopted the main features of this SOP.

These mutual life companies , roughly comparable to the mutual insurance associations permitted under German and Austrian law , are characterized by the insurance business they conduct with profit-sharing insurance.

scope of application

Paragraph 5 of FAS 120 in conjunction with SOP 95-1 defines the area in which FAS 120 or the other fundamental standards FAS 60 and FAS 97 are to be applied. According to this, two criteria must be met in order to be able to apply FAS 120:

  • Long-term contract with policyholders participating in the surpluses actually generated by the insurance company
  • Surpluses are distributed approximately in proportion to the extent to which the individual contract has contributed to the surplus

For US stock corporations, there is an option to apply the standard, but the provisions must be applied consistently; H. As soon as the standard is applied to a contract, all contracts of the insurance company that fall within the scope must also be accounted for in accordance with FAS 120.

Although the temporal separation of the creation and allocation of the surplus participation carried out for most of the policies sold in Germany and Austria is not explicitly covered by the standard due to the setting in the provision for premium refunds and the subsequent delayed transfer, according to experts, most of them still comply Contracts the application requirements. In addition, the accounting regulations of this standard are considered to be more appropriate for the situation in Germany and Austria - which is primarily determined by regulatory requirements - than the two older standards FAS 60 and FAS 97.

Bonuses and benefits

FAS does not explicitly regulate the procedure; SOP 95-1 is used for this. There it is regulated that gross premiums are posted to income when they are due. In addition to the premiums to be paid by the policyholder, these contributions also include bonuses allocated as part of the profit participation to increase the insurance benefit, annuity accumulated credits and bonuses offset against the contractually due premiums.

Insurance benefits and surrenders are posted as expenses in the income statement.

Actuarial reserve

The actuarial reserve ( liability for future policy benefits ) consists of three parts:

  • Net Level Premium Reserve (NLPR) - the net premium reserve formed as the difference between the present value of the future guaranteed benefits without regulatory expenses and the present value of the future reserve premiums
  • Liability for Terminal Dividends (LTD) - the provision to be recognized in the event of a probable payment and a possible reasonable estimate for terminal dividends, which is financed over the term of the contract
  • Provision for expected losses (analogous to FAS 60)

The bases used for calculating the surrender values ​​are used as the basis for calculating the NLPR. On the one hand, this applies to the biometric elimination regulations and , on the other hand, to the guaranteed interest rate, unless the interest rate on the investments ( dividend fund interest rate ) was used. For the reserve for expected losses, the methods described in FAS 60, such as the loss recognition test, are to be used.

For German and Austrian insurances, experts believe that the calculation bases of the premium calculation can be used. Thus, the results NLPR as zillmerized premium reserve. The prerequisites for the LTD are met by German and Austrian life insurance companies, only there is no recording via the RfB and the method of financing, which is done with the Estimated Gross Margins (see below) for FAS 120, differs.

Closing costs

General

In principle, the treatment of the closing costs follows FAS 60, but there are some deviations. The capitalizable shares of the total acquisition costs result in analogy to the regulations of FAS 97. Only those acquisition costs that can be capitalized may be recognized as deferred acquisition costs in the balance sheet that meet the so-called test of recoverability , i.e. H. whose present value can be repaid by the estimated gross margins.

Estimated gross margins

The estimated gross margins serve, on the one hand, to repay the capitalized acquisition costs and, on the other hand, to finance the final profit share. The respective amount of the repayment or saving of the surplus shares results from the course of the EGM.

The EGM are calculated according to Paragraph 22 SOP 95-1 from the gross premiums plus the investment income on the NLPR and minus the insurance benefits without regulatory expenses, the running costs, the change in the NLPR, the running surplus shares and the other income or expenses. The calculation bases are the biometric calculation bases determined according to paragraph 21 SOP 95-1 according to a best estimate approach, the cancellation probabilities and the capital market interest rate ( expected investment yield ).

The share for the repayment of the acquisition costs is determined as the quotient of the present value of the acquisition costs that can be capitalized and the present value of the EGM. The portion of the financing of the final profit participation is calculated analogously by applying the present value of the final profit participation.

The EGM histories must be checked regularly and, if necessary, an adjustment must be made by increasing provisions that were set up too low in the past or adjusting DACs that were redeemed too high and a high provision for terminal bonuses.

Special features according to German and Austrian law

Provision for administrative costs and provision for risks other than death and experience

The NLPR according to FAS 120 only takes into account guaranteed insurance benefits in the event of death or survival. The company's obligation to properly manage the contract portfolio and provisions for services due to other biometric risks are not taken into account. However, since the provision for administrative costs can be repurchased under both German and Austrian law, experts believe that it must be recorded in the balance sheet.

Provision for profit sharing

A provision for premium refunds is not foreseen according to FAS 120. Such a position is not necessary according to the usual designs in the USA. However, due to the surplus participation system in Germany and Austria, such a position makes sense. A few special features must be taken into account when setting up:

  • The final profit shares are not taken into account in the RfB, the LTD are recorded in the actuarial reserve and are not financed by the RfB
  • The endowment of the RfB is to be corrected to take into account the effects of transfers and revaluations
  • Earning restrictions that result in particular from the regulatory requirements for profit sharing (cf., for example, Minimum Allocation Ordinance ) must be taken into account

literature