FAS 97

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FAS 97 , official Statement of Financial Accounting Standards No. 97 , denotes an accounting standard issued by the 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 that they apply US GAAP directly or as part of an IFRS financial statement in accordance with IFRS 4 . In addition to FAS 97, there are essentially two other insurance standards, FAS 60 and FAS 120 . FAS 97 is an extension of FAS 60, so the older standard is often referred to and individual procedures that are not explicitly mentioned in the younger standard are generally followed in accordance with the older standard.

background

After FAS 60, the first accounting standard for insurance companies, was issued in June 1982, the FASB expanded the regulations for insurance accounting in December 1987 with FAS 97. The new standard mainly deals with guidelines for accounting for universal life policies, which are particularly characterized by the fact that both the amount of the contributions and the insurance benefit are flexible. This means that the expected gross surpluses cannot be described proportionally to the contributions, but rather depend on the expected surpluses from capital investments, biometrics, costs and the cancellation rate. The procedure prescribed in FAS 60 is therefore not applicable in proportion to the premium income of distributed accounting business results.

The scope of the standard is restricted to those insurance companies to which FAS 60 also applies. In addition to universal life contracts, investment policies and policies with shortened contribution payment periods also fall within the scope of FAS 97, whereby only those contracts are considered that are long- term contracts according to FAS 60 .

In Germany, capitalization transactions and unit-linked or index-linked life insurances in particular fall within the scope of FAS 97, although in the latter case it may also make sense to take FAS 120 into account for policies that are entitled to profit.

Bonuses and benefits

In the case of policies with a shortened contribution period, premiums and benefits are recognized in profit or loss, with a provision being made for the premium portions exceeding the reserve and repayment premium.

With universal life policies, the entire gross premium is recognized in the actuarial reserve before the premium components for costs and risk are withdrawn from the reserve. This means that only these contribution shares, investment income and cancellation deductions affect income. Contributions that are not due for services in the current period must also be recognized as a liability.

Actuarial reserve

For contracts with a shortened contribution period, the regulations of FAS 60 apply. The main difference is the distribution of expected profits after the end of the contribution period and their realization regardless of the contribution amount.

The actuarial reserve for universal life policies is divided into four parts:

  • Account Balance - retrospectively determined policyholder credit,
  • Unearned Revenue Reserve (URR) - provision for contributions not charged for services in the current period,
  • Contributions that are refunded at the end of the contract,
  • Reserve for expected losses (analogous to FAS 60).

In contrast to the contracts accounted for in accordance with FAS 60, no safety surcharges or discounts should be taken into account when calculating the actuarial reserve. Rather, it is determined using a best estimate approach. Due to the recursive calculation through the accumulation of the contributions minus the risk and cost withdrawals and in practice often only small contractual guarantees, additional safety margins are rather superfluous. For the reserve for expected losses, the methods described in FAS 60, such as the loss recognition test, are to be used.

Closing costs

General

The acquisition costs are accounted for as deferred acquisition costs analogous to FAS 60 , with repayment only taking place during the contribution payment period. Only the acquisition costs that can be capitalized and that meet the so-called test of recoverability may be recognized in the balance sheet, i.e. H. whose present value can be redeemed by the Estimated Gross Profits (see below).

For Universal Life contracts, according to the standard, there is a deviation from FAS 60 in that acquisition costs that are in a fixed ratio to the premium or sum insured and occur periodically or occur as a fixed amount from period to period cannot be capitalized. In practice, however, such a differentiation is not carried out following a recommendation by the AICPA .

Estimated Gross Profits

The DAC is repaid through a fixed portion of the expected gross profit each year, the so-called Estimated Gross Profits (EGP). These are determined as the sum of all differences from contractual additions and withdrawals and the associated income and expenses. Therefore, they can be described as the sum of five components:

  • contractual risk premium without exceeding the insurance benefits that go beyond the account balances that are released;
  • contractual withdrawals for costs without estimated ongoing costs
  • Investment income without contractually guaranteed interest on the account balances
  • contractual deductions upon termination of the contract (e.g. cancellation discount);
  • other contractual or estimated income and expenses.

To determine the portion of the annual repayment of the acquisition costs, the present value of the EGP must first be calculated using the discount rate of the account balances. The repayment for the financial year is then calculated as the EGP for the financial year multiplied by the quotient of the present value of the EGP and the present value of the capitalized acquisition costs.

In contrast to FAS 60, the repayment does not follow the lock-in principle. The EGP are to be checked regularly and changes in the best estimate assumptions are to be taken into account as write-ups or write-downs on the DAC and the URR. For this purpose, in a first step, the past EGPs are replaced by the actually realized raw results and then, in a second step, the future EGPs are adapted to the changed assumptions or inventory compositions.

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