Updates on Revenue Recognition for Insurance Entities
FASB ASC 606, Revenue for Contracts with Customers, contained broad changes for the way many industries should account for revenues in their financial statements. However, insurance entities were largely scoped out of these new pronouncements. The Financial Accounting Standards Board (FASB) issued clarifying guidance, FASB ASU 2016-20, stating that all contracts within the scope of FASB ASC 944, such as investment contracts, life and health insurance, property and liability insurance, title insurance and mortgage guarantee insurance, are excluded from the scope of FASB ASC 606.
The exception above does not apply to all contracts of insurance entities. An insurance entity should consider whether a contract with a customer is for goods or services that are not within the scope of Topic 944; for example, a contract for administrative services (such as claims processing) without any insurance element is currently accounted for as a revenue arrangement within the scope of Topic 605. The FASB expects that those types of service arrangements would be accounted for under Topic 606. Contract fulfillment activities would be considered part of the contract within the scope of Topic 944. This assessment is similar to how an insurance entity determines whether elements of a contract are within the scope of Topic 944 or Topic 605 today.
Below are examples of activities performed by an insurance entity, included in contracts within the scope of FASB ASC 944, that the Financial Reporting Executive Committee (FinREC) believes generally should be considered fulfillment activities (that either mitigate risks to the insurer or contain costs related to services to fulfill the insurer's obligation). They should not be considered within the scope of FASB ASC 606, but should be considered part of the contract within the scope of FASB ASC 944:
- Claims adjudication and processing
- Health insurance contracts within the scope of FASB ASC 944
- Roadside assistance programs
- Cybersecurity activities
- Title searches
GAAP reporters should have a clear understanding of how their contracts with customers are structured to apply this new guidance correctly.
Companies should also consider whether the changes dictated by Topic 606 will have an impact on taxable income in light of the Tax Cuts and Jobs Act (TCJA). Prior to the TCJA, revenue would not have been recognized for tax purposes until the “all-events” test had occurred, part of which included economic performance. Section 451(b) of the Internal Revenue Code was amended by the TCJA and states that the “all-events” test for “any item of gross income shall not be treated as met any later then when such item is considered as revenue in the taxpayer’s applicable financial statement”. As a result, revenue may now be recognized for tax purposes even though economic performance has not yet occurred.
If you have questions about applying the revenue recognition standard for your insurance entity, please contact Todd Goldenhersh, Audit Services Partner, at email@example.com or 314.983.1205.
For more information about our services for the insurance industry, contact Alan Fine, Tax Partner and Insurance Industry Group Leader, at firstname.lastname@example.org or 314.983.1292.