ASC

ASC 720-944

Financial Services—Insurance

720 Other Expenses

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In brief

IntermediateRecognitionIndustry-specificInitial measurement

ASC 944-720 tells insurance entities which costs must be expensed as incurred rather than capitalized as deferred acquisition costs. Because 944-30-25-1A permits capitalization only of incremental direct acquisition costs relating to successful contract acquisitions or renewals, everything else — non-qualifying acquisition-related costs and all indirect costs — is charged to expense as incurred (944-720-25-2).

Key points (6)
  • 944-720-25-2(a) requires an insurance entity to expense as incurred any acquisition-related cost that fails the capitalization criteria of 944-30-25-1A.
  • 944-720-25-2(b) requires an insurance entity to expense as incurred all indirect costs.
  • Per 944-720-55-1, non-capitalizable acquisition-related costs include soliciting potential customers, market research, training, administration, unsuccessful acquisition or renewal efforts, and product development — except direct-response advertising capitalized under 944-30-25-1AA.
  • Per 944-720-55-2, indirect costs that must be expensed include administrative costs, rent, depreciation, occupancy costs, equipment costs (including data processing equipment dedicated to acquiring insurance contracts), and other general overhead.
  • The Subtopic follows the scope of 944-10-15 (944-720-15-1) and observes that sales expense structures vary — agent commissions tied to business produced, salaried branch/field personnel, or mass-marketing channels (944-720-05-2 through 05-4).
  • For accounting for insurance costs by an insured (non-insurer) entity, look to Subtopic 720-20 rather than this Subtopic (944-720-60-1).

For students. This is the mirror image of the DAC rules: after ASU 2010-26 only incremental direct costs of *successful* contract acquisitions may be deferred, so know the expense-as-incurred lists cold. The most common mistake is deferring costs of unsuccessful selling efforts, training, or overhead allocated to acquisition activity — only direct-response advertising meeting 944-30-25-1AA escapes immediate expensing.

deferred acquisition costssuccessful efforts capitalizationindirect costsexpense as incurreddirect-response advertisingagent commissionsgeneral overheadinsurance entity

Machine-generated study aid for ASC 720-944. Check the source paragraphs below.

720-944-00Status

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720-944-05Overview and Background

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720-944-05-1
This Subtopic provides guidance to insurance entities on accounting for and financial reporting of other expenses.
720-944-05-2
In a number of life insurance entities, virtually all sales expense is composed of compensation paid to agents. Such compensation relates directly to the amount of business produced by an agent.
720-944-05-3
In other entities, considerably less compensation will be paid to agents; however, additional sums will be paid to salaried employees, such as branch managers and employees, or to field representatives, who call on and assist the agents.
720-944-05-4
There are also entities that do not sell through agents. Some entities use mail, the internet, and other mass-marketing methods to sell their products.

720-944-15Scope and Scope Exceptions

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Overall Guidance

720-944-15-1
This Subtopic follows the same Scope and Scope Exceptions as outlined in the Overall Subtopic, see Section 944-10-15.

720-944-25Recognition

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720-944-25-1
Paragraph 944-30-25-1A requires that an insurance entity capitalize certain acquisition costs directly related to successful contracts.
720-944-25-2
An insurance entity shall charge to expense as incurred any of the following costs:
  1. a
    An acquisition-related cost that cannot be capitalized in accordance with paragraph 944-30-25-1A (for implementation guidance, see paragraph 944-720-55-1)
  2. b
    An indirect cost (for implementation guidance, see paragraph 944-720-55-2).

720-944-55Implementation Guidance and Illustrations

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Implementation Guidance

720-944-55-1
This implementation guidance addresses paragraph 944-720-25-2(a), which requires that an insurance entity charge to expense as incurred any acquisition-related cost that cannot be capitalized in accordance with paragraphs 944-30-25-1A through 25-1AA. Such costs include costs of all of the following:
  1. a
    Soliciting potential customers (except direct-response advertising capitalized in accordance with paragraph 944-30-25-1AA)
  2. b
    Market research
  3. c
    Training
  4. d
    Administration
  5. e
    Unsuccessful acquisition or renewal efforts (except direct-response advertising capitalized in accordance with paragraph 944-30-25-1AA)
  6. f
    Product development.
720-944-55-2
This implementation guidance addresses paragraph 944-720-25-2(b), which requires that an insurance entity charge to expense as incurred any indirect cost. Such costs include all of the following:
  1. a
    Administrative costs
  2. b
    Rent
  3. c
    Depreciation
  4. d
    Occupancy costs
  5. e
    Equipment costs (including data processing equipment dedicated to acquiring insurance contracts)
  6. f
    Other general overhead.

720-944-60Relationships

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Other Expenses

720-944-60-1
For guidance on accounting for insurance costs by any insured entity, see Subtopic 720-20.

Related subtopics