{"schema_version":2,"canonical_url":"https://asc.understandingaccounting.org/asc/944/30/#35-subsequent-measurement","source":"FASB Accounting Standards Codification, Basic View","usage":"Study and research edition. Verify current requirements with the official source. Summaries, enrichment, and tags are machine-generated study aids. Paragraph html preserves source markup; snippet is abbreviated. Pending content is not necessarily effective.","topic":"944","topic_title":"Financial Services—Insurance","subtopic":"944-30","subtopic_title":"Acquisition Costs","section":{"number":"35","label":"35 Subsequent Measurement","anchor":"35-subsequent-measurement","is_sec":false,"groups":[{"block":null,"heading":null,"paragraphs":[{"citation":"944-30-35-1","para":"35-1","html":"The Subsections in this Section address
acquisition costs and other costs.
Acquisition costs capitalized under paragraphs shall be charged to expense in proportion to premium revenue recognized under Subtopic 944-605. If acquisition costs for short-duration contracts are determined based on a percentage relationship of costs incurred to premiums from contracts issued or renewed for a specified period, the percentage relationship and the period used, once determined, shall be applied to applicable unearned premiums throughout the period of the contracts.
Capitalized acquisition costs shall be charged to expense using assumptions consistent with those used in estimating the liability for future policy benefits(or any other related balance) for the corresponding contracts (see Subtopic 944-40), as applicable (for example, terminations). For contracts with accumulation and payout phases, the payout phase shall be viewed as a separate contract under this Topic and shall not be combined with the accumulation phase for amortization of capitalized acquisition costs. Acquisition costs capitalized under paragraphs 944-30-25-1A through 25-1AA shall be charged to expense on a constant level basis—either on an individual contract basis or on a grouped contract basis—over the expected term of the related contract(s) as follows:- a
Individual contracts. Capitalized acquisition costs shall be charged to expense on a straight-line basis.
- b
Grouped contracts. Capitalized acquisition costs shall be charged to expense on a constant-level basis that approximates straight-line amortization on an individual contract basis. Contracts shall be grouped consistent with the grouping used in estimating the liability for future policy benefits (or any other related balance) for the corresponding contracts.
The resulting amortization amount shall not be a function of revenue or profit emergence. The amortization method shall be applied consistently over the expected term of the related contract(s). The balance of capitalized acquisition costs shall be reduced for actual experience in excess of expected experience (that is, as a result of unexpected contract terminations). The effect of changes in future estimates (for example, revisions of mortality or lapse assumptions as required in paragraph 944-40-35-5(a)) shall be recognized over the remaining expected contract term as a revision of the future amortization amounts. No interest shall accrue on the unamortized balance of capitalized acquisition costs. In determining amortization expense, future deferrable costs shall not be included before the incurrence and capitalization of those costs.
Sales inducementsdeferred under paragraph 944-30-25-7 shall be amortized using the same methodology and assumptions used to amortize capitalized acquisition costs. No interest shall accrue to the unamortized balance of deferred sales inducements. In determining the amortization expense, future deferrable sales inducements shall not be included before the incurrence and capitalization of those sales inducements. The payout phase is viewed as a separate contract under this Topic and shall not be combined with the accumulation phase for amortization of deferred sales inducements. The amortization method described in paragraphs 944-30-35-3 through 35-3C shall be used to amortize acquisition costs deferred under paragraphs 944-30-25-1A through 25-1AA for investment contracts that include significant surrender charges or that yield significant revenues from sources other than the investment of contract holders' funds. Acquisition costs deferred under paragraphs 944-30-25-1A through 25-1AA for other investment contracts shall be amortized using an accounting method that recognizes costs as expenses at a constant rate applied to net policy liabilities and that is consistent with the interest method under Subtopic 310-20. The incidence of surrenders (if they are probable and can be reasonably estimated) can be anticipated for purposes of determining the amortization period. The rate of amortization shall be adjusted for changes in the incidence of surrenders to be consistent with the handling of principal prepayments under Subtopic 310-20. Under some methods, the contract liabilities may be calculated net of deferred acquisition costs. In that event, the amounts of deferred acquisition costs and contract liabilities have to be determined separately.
If an internal replacement (as described in this Subsection) occurs and the rights and obligations of the parties to the contract are substantially unchanged (based on an evaluation of the conditions specified in paragraph 944-30-35-37) from those under the replaced contract, the replacement contract shall be accounted for as a continuation of the replaced contract in accordance with the guidance beginning in paragraph 944-30-35-38. If the internal replacement occurs and results in a replacement contract that is substantially changed from the replaced contract, the replaced contract shall be accounted for as extinguished in accordance with the guidance in paragraphs . Modifications (other than partial withdrawals, surrenders, or reductions in coverage [see paragraph 944-30-35-29]) that result from the election by the contract holder of a benefit, feature, right, or coverage that was within the original contract are not internal replacements subject to this guidance as long as all of the following conditions are met: - a
The election is made in accordance with terms fixed or specified within narrow ranges in the original contract.
- b
The election of the benefit, feature, right, or coverage is not subject to any underwriting.
- c
The insurance entity cannot decline to provide the coverage or adjust the pricing of the benefit, feature, right, or coverage.
- d
The benefit, feature, right, or coverage had been accounted for since the inception of the contract.
Examples of (d) in the preceding paragraph include both of the following:
- a
The option to elect the feature is an embedded option within the contract that is required to be accounted for under Subtopic 815-15. - b
The existence of the option to elect a feature was assessed in the classification of and accounting for the contract, such as the classification of the contract as an insurance contract under Section 944-30-15.
The payout phase of a contract is separate and distinct from and shall not be accounted for as a continuation of the accumulation phase, even if annuitization is in accordance with terms fixed in the original contract. Partial withdrawals, surrenders, or reductions in coverage (for example, reduced face amount on a life insurance contract or higher deductibles on a property casualty contract), as allowed by terms that are fixed and specified at contract inception either in the contract or other information available to the contract holder or, if required by state law or regulation, at terms in effect when the reduction is made for that benefit, feature, right, or coverage, whether or not surrender charges or other termination charges are assessed, are not internal replacements subject to this guidance, as long as there are no reunderwriting or other modifications to the contract, at that time, that would require evaluation under paragraph 944-30-35-37. For long-duration contracts, integrated contract features are those for which the benefits provided by the feature can be determined only in conjunction with the account value or other contract holder balances related to the base contract, and nonintegrated contract features are those for which the determination of benefits provided by the feature is not related to or dependent on the account value or other contract holder balances of the base contract. Underwriting and pricing for nonintegrated contract features typically are executed separately from other components of the contract, and it is inherent in this concept that the premium charged is not in excess of an amount that is commensurate with the incremental insurance coverage provided. For short-duration contracts, nonintegrated contract features are those that provide coverage that is underwritten and priced only for that incremental insurance coverage, and do not result in the explicit or implicit reunderwriting or repricing of other components of the contract. It is inherent in this concept that the premium charged is not in excess of an amount that is commensurate with the incremental insurance coverage provided. Additional coverage provided by a nonintegrated contract feature would be considered nonintegrated even though the entire coverage provided by the short-duration contract may be subject to only one deductible or limit in the event of an insured loss. For short-duration contracts, integrated contract features are those where there is explicit or implicit reunderwriting or repricing of existing components of the base contract.
If a contract feature or coverage is nonintegrated, the addition or election of that feature or coverage, in and of itself, does not change the existing base contract and, as a result, further evaluation of the base contract under paragraph 944-30-35-37 is not required. The nonintegrated contract feature or coverage shall be accounted for in a manner similar to a separately issued contract.
Subsequent modifications made only to the nonintegrated contract feature or coverage shall be evaluated under paragraphs separately from the base contract, and any deferred acquisition costs related to the nonintegrated contract feature or coverage accounted for accordingly. Subsequent termination of a nonintegrated contract feature or coverage shall be accounted for as an extinguishment of only the balances related to the nonintegrated contract feature or coverage.
For contract modifications involving integrated contract features or coverages (other than those contract modifications described in paragraphs ) the insurance entity shall review the conditions set forth in paragraph 944-30-35-37 to determine whether the contract has changed substantially as a result of the modification. As a result of that review, either of the following actions shall be taken:
- a
Continuation. A contract modification meeting all of the conditions in paragraph 944-30-35-37 results in a replacement contract that is substantially unchanged from the replaced contract, and shall be accounted for as a continuation of the replaced contract in accordance with paragraphs and . - b
Extinguishment. A contract modification that fails any of the conditions in paragraph 944-30-35-37 results in a replacement contract that is substantially changed from the replaced contract, and shall be accounted for as an extinguishment of the replaced contract in accordance with paragraphs .
An internal replacement (other than those described in paragraphs ) is determined to involve contracts that are substantially unchanged only if all the following conditions exist: - a
The insured event, risk, or period of coverage of the contract has not changed, as noted by no significant changes in the kind and degree of mortality risk, morbidity risk, or other insurance risk, if any. - b
The nature of the investment return rights (for example, whether amounts are determined by formulas specified by the contract, pass through of actual performance of referenced investments, or at the discretion of the insurer), if any, between the insurance entity and the contract holder has not changed.
- c
No additional deposit, premium, or charge relating to the original benefit or coverage, in excess of amounts specified or allowed in the original contract, is required to effect the transaction; or if there is a reduction in the original benefit or coverage, the deposit, premiums, or charges are reduced by an amount at least equal to the corresponding reduction in benefits or coverage.
- d
Other than distributions to the contract holder or contract designee or charges related to newly purchased or elected benefits or coverages, there is no net reduction in the contract holder's account value or, for contracts not having an explicit or implicit account value, the cash surrender value, if any.
- e
There is no change in the participation or dividend features of the contract, if any.
- f
There is no change to the amortization method or revenue classification of the contract.
If any of the conditions are not met, an internal replacement is determined to involve a replacement contract that is substantially changed from the replaced contract. Example 2 (see paragraph
944-30-55-33) illustrates the application of this guidance.
An internal replacement that is determined to result in a replacement contract that is substantially unchanged from the replaced contract shall be accounted for as a continuation of the replaced contract. However, even if both accumulation and payout phase contracts are investment contracts involving no life contingencies, the payout phase of a contract is separate and distinct from and cannot be accounted for as a continuation of the accumulation phase of the contract. For a short-duration contract, renewal results in a separate and distinct contract that cannot be accounted for as a continuation of the previous contract. Example 1 (see paragraph
944-30-55-12) illustrates the application of this guidance.
Unamortized deferred acquisition costs, unearned revenue liabilities, and deferred sales inducement assets associated with the replaced contract shall continue to be deferred and amortized or earned in connection with the replacement contract. If the replaced contract was acquired in a business combination, any present value of future profits shall be accounted for in a similar manner.
Other balances associated with the replaced contract, such as any liability for minimum guaranteed death benefits or guaranteed minimum income benefits, shall be accounted for in a similar manner, that is, as if the replacement contract is a continuation of the replaced contract.
For long-duration contracts other than investment contracts described in paragraph 944-30-35-48, a replacement contract that is substantially unchanged shall be viewed as a prospective revision of the replaced contract with future amortization of unamortized deferred acquisition costs adjusted, accordingly, on a prospective basis. Under the prospective revision methodology for long-duration contracts other than certain investment contracts, the unamortized deferred acquisition costs balance at the time of replacement is unchanged. If it is not reasonably practicable for an insurance entity to account for a contract exchange that has resulted in a replacement contract that is substantially unchanged from the replaced contract, the insurance entity shall determine the balance of unamortized deferred acquisition costs related to the replaced contract to carry forward to the replacement contract and determine future amortization on a prospective basis. The total balance of unamortized deferred acquisition costs before the internal replacement shall be allocated between replaced contracts and contracts remaining in the original book of business based on a reasonable and systematic allocation process. For contracts to which the interest method amortization methodology discussed in Subtopic 310-20 is applied, the replacement contract represents revisions to the cash flows of the replaced contract, and unamortized deferred acquisition costs and deferred sales inducement assets are adjusted accordingly. The balance of unamortized deferred acquisition costs and other contract-related balances shall be updated based on the most current assumptions at the time of the internal replacement.
Any related liability for future policy benefits or market risk benefits for a substantially unchanged contract shall be updated as described in Subtopic 944-40 on claim costs and liabilities for future policy benefits. Other balances that are determined based on activity over the life of the contract, such as an additional liability for death or other insurance benefits (which, under this Subtopic, is determined based on assessments and benefit costs) shall be calculated considering the entire revised life of the contract, including activity during the term of the replaced contract.
A revision to a short-duration contract is viewed as a prospective revision with future recognition of unearned premium and amortization of unamortized deferred acquisition costs adjusted, accordingly, on a prospective basis.
Consistent with the guidance in paragraphs 944-30-35-1A and 944-605-25-1, unearned premium is recognized as revenue over the period of the contract in proportion to the amount of insurance protection provided, amortization of deferred acquisition costs continues to be recognized in proportion to the premium recognized, and the revised amortization ratio is used prospectively. If the modification is a reduction in benefits with a directly proportionate reduction in premiums, the modification shall result in an immediate proportionate reduction in unamortized deferred acquisition costs rather than a prospective revision.
Costs incurred in connection with an internal replacement that results in a replacement contract that is substantially unchanged from the replaced contract shall be accounted for as policy maintenance costs and charged to expense as incurred. The portion of renewal commissions paid on the replacement contract that meets the criteria for deferral under this Subtopic, limited to the amount of the future deferrable renewal commissions on the replaced contract that would have met the deferral criteria, continues to be deferrable under those provisions.
If an insurance entity assesses a surrender charge on the replaced contract that is offset by an immediate sales inducement to a contract holder on the replacement contract, the insurance entity shall offset any surrender charges assessed against the contract holder's account balance under the replaced contract against any stated immediate sales inducement to determine whether there has been a net reduction in the contract holder's account value in accordance with paragraph 944-30-35-37. The liability for a sales inducement to a contract holder offered in conjunction with an internal replacement of a long-duration contract that is determined to result in a replacement contract that is substantially unchanged from the replaced contract shall be accounted for from the date of its addition to the replacement contract in accordance with the guidance in paragraph 944-40-25-12. Sales inducements provided to the contract holder, whether for investment or universal life-type contracts, shall be recognized as part of the liability for policy benefits over the period in which the contract must remain in force for the contract holder to qualify for the inducement or at the crediting date, if earlier, in accordance with paragraphs . No adjustments shall be made to reduce the liability related to the sales inducements for anticipated surrender charges, persistency, or early withdrawal contractual features. The criteria in paragraphs for recognition of a related sales inducement asset cannot be satisfied in these circumstances because the sales inducement was not specifically identified in the original contract. Front-end fees assessed in connection with an internal replacement of a long-duration contract shall be evaluated for deferral in accordance with the guidance in Subtopic 944-605 on revenue recognition. Unamortized deferred acquisition costs for short-duration contracts and the present value of future profits continue to be subject to premium deficiency testing in accordance with the provisions of Subtopic 944-60. Proceeds from reinsurance transactions that represent recovery of acquisition costs shall reduce applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expense in accordance with the amortization guidance in this Section that applies to those unamortized acquisition costs.