Thetheory of insurance has been around as long as humans have. The point ofinsurance is to aid in eliminating risks and spreads the risk from theindividual to a larger community which diminishes the threat that all insurancepolicyholders will have losses at the same time. Insurance also offers a significantfoundation of long-term finance for both the public and private sectors. Insurance contracts in financial statementsare to be categorized as short-duration or long-duration contracts. Long termcontracts contain contracts such as whole-life insurance and annuities, whereshort term contracts would include property and liability insurance contracts. Allinsurance policies have a requirement to be in a legal form or document. In American insurance policies are controlledthe Financial Accounting Standards Board (FASB) where by state law and eachstate may specify that they only need specific forms for specific types ofinsurance.
Furthermore, to make sure these regulations are being obeyed thesepolicies must be then accepted by the state insurance department. There arealso insurance rules from the International Financial Reporting Standards(IFRS) that must be followed by the world about how particular types oftransactions should be reported in financial statements, like how to insurancecompanies report their statements. In this past year, there have been two majorrules created by FASB and IFRS that are becoming issues for accountants due tothe time and energy that has to be given to follow them. ASC 606 is beingproposed by FASB to progress financial standard on recognition of revenue fromcontracts with customers. IFRS 17 is IFRS’s new insurance contract that willentail detailed disclosures for insurance company’s financial statements. Thechanges to the disclosures will offer investors more info on these insurancecompanies recognized amounts from insurance contracts and the extent of risks ascendingfrom their insurance policies. (Chan, 2016) Some feel that these rules will becostly and are not worth the time and energy, while others, like myself, feelthat they are much needed and will completely help the insurance industry. FASBand the International Accounting Standards Board (IASB) distributed joineddirection on recognizing revenue from contracts with customers.
The new guidanceis a major achievement to improve this important area of financial reporting. InJune 2014, the FASB and the IASB proclaimed the creation of the FASB-IASB JointTransition Resource Group for Revenue Recognition (TRG). The objective of thisgroup is to notify the Boards about possible application problems that mightoccur when businesses state using the newly created revenue standard. The groupwas also in place to help investors better comprehend explicit facets of thenewly created standards.
ASC 606, Revenue from Contracts with Customers,was issued mutually by the FASB and IASB on May 28, 2014. For publicentities, the original active date for yearly reporting periods begin afterDecember 15th, 2016. The ASC 606 rule was then differed to the active date offor another year, so public business entities, not-for-profit entities, andemployee benefit plans, the effective date would begin after December 15, 2017.
All other entities the effective date would be after December 15th, 2018. (ASC606 — Revenue from Contracts with Customer, n.d.) The new amendment will beeffecting all businesses that have contracts to transfer goods and services toclients in exchange for money.
The purpose of ASC 606 is to create guidelineson how to account for the nature, timing and risk of revenue from contractswith customers for the users of financial statements. The ones that made thisstandard want to remove discrepancies and flaws in the current revenuerequirements, have a stronger outline for revenue issues, and improving thesimilarity of revenue recognition ways throughout all industries. The new ASC 606standard will not alter the demands that revenue be acknowledged for only quantitiesnot anticipated to be returned.
Though, because a right of return is in existencemarks the price flexible and subject to the constraint which will end in a variationin timing of revenue recognition to the degree a company determines that the appraisedsum varies from the estimation under current GAAP rules. Being consistent withGAAP rules, rights of return can be contractual or based on a business’scustomary practice. (Impact of the New Revenue Recognition Standard, 2015)Also,the standard was created to deliver improved disclosure rules and to streamlinehow the statements are arranged by decreasing the quantity of requirements thatthe companies must obey by. All insurance contracts are to be recorded underthe same guidelines as before, ASC 944, however some insurance companiesusually perform other services to their customers that are actually not thoughtof as insurance contracts under ASC 944.
In these cases, the need to conformand understand ASC 606 is significant and must not be ignored. These types ofother services that insurance companies do that are not under ASC 944 whichinclude but are not limited to agency and advisory type arrangements, claimsprocessing, property valuation, appraisal services, and info risk managementservices. These types of services could be done on an unrelated basis from theunderlying insurance contract and the performance obligations might bedifferent for those services in comparison to the performance obligations ofthe underlying contract. What this leads to is the need to separately recognizeand calculate the suitable revenue recognition arrangement for each performanceobligation acknowledged by the insurance company. This will create some challengeswhen the contract amount for insurance intermediaries includes services forclaims handing, policy endorsements, risk management and must be independently beexamined for allocation of the contract amount to these performanceobligations. However, this will be drastically beneficial for the insurancecompany financial statement users to understand the risks and rewards of thiscompany.