Official releases: SOP 03-1 ... ethics interpretations and rulings.

Position:Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts
 
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Space considerations prevent publishing here the appendices to SOP 03-1. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 03-1 (product no. 014936), contact the AICP4 order department at 888-777-7077.

SOP 03-1--Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts

NOTE

Statements of Position on accounting issues present the conclusions of at least two-thirds of the Accounting Standards Executive Committee, which is the senior technical body of the Institute authorized to speak for the Institute in the areas of financial accounting and reporting. Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, identities AICPA Statements of Position that have been cleared by the Financial Accounting Standards Board as sources of established accounting principles in category b of the hierarchy of generally accepted accounting principles that it establishes. AICPA members should consider the accounting principles in this Statement of Position if a different accounting treatment of a transaction or event is not specified by a pronouncement covered by Rule 203 of the AICPA Code of Professional Conduct. In such circumstances, the accounting treatment specified by the Statement of Position should be used, or the member should be prepared to justify a conclusion that another treatment better presents the substance of the transaction in the circumstances.

TABLE OF CONTENTS

Summary

Foreword

Introduction and Background

Nontraditional Annuity and Life Insurance Contracts

Applicability and Scope

Conclusions

Separate Account Presentation

Accounting for an Insurance Enterprise's Interest in a Separate Account

Transfers to Separate Accounts

Valuation of Liabilities

Contracts With Death or Other Insurance Benefit Features

Accounting for Contracts That Provide Annuitization Benefits

Sales Inducements to Contract Holders

Disclosures

Effective Date and Transition

APPENDIX A--Basis for Conclusions

Separate Account Presentation

Accounting for an Insurance Enterprise's Interest in a Separate Account

Transfers to Separate Accounts

Valuation of Liabilities

Contracts with Death or Other Insurance Benefit Features

Accounting for Contracts that Provide Annuitization Benefits

Sales Inducements to Contract Holders

Disclosures

Effective Date and Transition

APPENDIX B--Illustration for Presentation of an Insurance Enterprises Interest in a Separate Account

APPENDIX C--Sample Disclosures

APPENDIX D--Application of Statement of Position--Product and Product Feature Examples

APPENDIX E--Illustrations of the Calculation of Minimum Guaranteed Death Benefit Liability

GLOSSARY

SUMMARY

This Statement of Position (SOP) provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. This SOP requires, among other things, the following:

* Separate account presentation. The portion of separate account assets representing contract holder funds should be measured at fair value and reported in the insurance enterprise's financial statements as a summary total, with all equivalent summary total for related liabilities, if the separate account arrangement meets all the criteria specified in paragraph 11 of tiffs SOP. If a separate account arrangement does nor meet the criteria, assets representing contract holder funds under the arrangement should be accounted for and recognized as general account assets. Any related liability should be accounted for as a general account liability.

* Interest in separate accounts. Assets underlying an insurance enterprise's proportionate interest in a separate account do not represent contract holder funds, and thus do not qualify for separate account reporting and valuation. If a separate account arrangement meets the criteria of paragraph 11 of this SOP and (a) the terms of the contract allow the contract bolder to invest in additional units in the separate account or (h) the insurance enterprise is marketing contracts that permit timers to be invested in the separate account, the assets underlying the insurance enterprise's proportionate interest in the separate account should be accounted for in a manner consistent with similar assets held by the general account that the insurance enterprise may be required to sell.

If the insurance enterprise's proportionate interest in the separate account is less than 20 percent of the separate account and all of the underlying investments of the separate account meet the definition of securities under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities, or paragraph 46 of FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises, as amended by FASB Statement No. 115, or cash and cash equivalents, the insurance enterprise may report its portion of the separate account value as an investment in equity securities classified as trading under FASB Statement No. 115.

* Gains and losses on the transfer of assets from the general account to a separate account. Assets transferred from the general account to a separate account should be recognized at fair value to the extent of third-party contract holders' proportionate interest in the separate account if the separate account arrangement meets the criteria in paragraph 11 of this SOP Any resulting gain related to the third-party contract holder's proportionate interest should be recognized immediately in earnings of the general account of the insurance enterprise, provided that the risks and rewards of ownership have been transferred to contract holders using the fair value of the asset at the date of the contract homers assumption of risks and rewards. A guarantee of the asset's value or minimum rate of return or a commitment to repurchase the asset would not transfer the risks of ownership, and no gain should be recognized. If the separate account arrangement does not meet the criteria in paragraph 11 of this SOP, the transfer generally should have no financial reporting effect (that is, general account classification and carrying amounts should be retained). However, in certain situations, loss recognition may be appropriate.

* Liability valuation. The basis for determining the balance that accrues to the contract holder for a long-duration insurance or investment contract that is subject to FASB 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 (paragraphs 15 and 17(a)), is the accrued account balance. The accrued account balance equals:

  1. Deposit(s) net of withdrawals;

  2. Plus amounts credited pursuant to the contract;

  3. Less fees and charges assessed;

  4. Plus additional interest (for example, persistency bonus); and

  5. Other adjustments (for example, appreciation or depreciation recognized in accordance with paragraph 21 of this SOP to the extent not already credited and included in item 2).

    For contracts that have features that may result in more than one potential account balance, the accrued account balance should be based on the highest contractually determinable balance that will be available in cash or its equivalent at contractual maturity or the reset date, without reduction for future fees and charges. The accrued account balance should not reflect any surrender adjustments (for example, market value annuity adjustments, surrender charges, or credits). For contracts in which amounts credited as interest to the contract holder ale reset periodically, the accrued balance should be based on the highest crediting rate guaranteed or declared through the reset date.

    * Return based on a contractually referenced pool of assets or index. For a contract not accounted for under the provisions of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, that provides a return based on the total return of a contractually referenced pool of assets either through crediting rates or termination adjustments, the accrued account balance should be based on the fair value of the referenced pool of assets (or applicable index value) at the balance sheet date even if the related assets are not recognized at fair value.

    * Determining the significance of mortality and morbidity risk and classification of contracts that contain death or other insurance benefit features. To determine the accounting under FASB Statement No. 97 for a contract that contains death or other insurance benefit features, the insurance enterprise should first determine whether the contract is an investment or universal life type contract. If the mortality or morbidity risks are other than nominal and the fees assessed or insurance benefits are not fixed and guaranteed, the contract should be classified as a FASB Statement No. 97 universal-life type contract. There is a rebuttable presumption that a contract has significant mortality risk where the additional insurance benefit would vary significantly in response to capital markets volatility. The determination of significance should be made at contract inception, other than at transition, and should be based on a comparison of the present value of expected excess payments (that is, insurance benefit amounts and related incremental claim adjustment expenses in excess of the account balance) to be made under insurance benefit features with the present value of all amounts expected to be assessed against the contract holder (revenue).

    * Accounting for contracts that contain death or other insurance benefit features. For contracts classified as insurance contracts that have amounts assessed against contract holders each period for the insurance...

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