Running head: FASB PROPOSAL- LIABILITY 1

FASB Proposal- Liability

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FASB Proposal- Liability

The Financial Accounting Standards Board (FASB) is considered to be an independent

non-profit organization body responsible for establishing the accounting and financial reporting

standards for both profit and non-profit making organizations in the United States. The body

follows the Generally Accepted Accounting Principles (GAAP) (Palmrose & Kinney, 2018). The

body is also involved in giving accounting standards update and on May 2015, it issued the

updated number 2015-09 (FASB No. 2015-09, 2015). The update was based on Financial

Services – Insurance where the board proposed accounting standards update affecting insurance

contracts.

Highlights of What Changed

The main changes which would arise as a result of the update is the increase in the

decision usefulness of the information which pertains the reporting entity’s insurance liabilities.

This meant that the nature, amount, timing and uncertainty of cash flows which were related to

those liabilities and effect they had the statement of comprehensive income will be affected.

More so, the update was to improve the comparability existing between the any reporting entities

in spite of the form of entity issuing the contract. The proposed changes were guided by the 2013

proposed update which advocated for different recognition and measurement models for both

short- and long-term duration contracts (FASB No. 2015-09, 2015).

Why

The main reasons why the changes were being done was to increase transparency of

significant estimates which were made in measuring the liability for unpaid claims and the claim
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adjustment expense. More so, the board aimed at improving the comparability of financial

statements from various organizations through ensuring that there was consistent disclosure of

information. The update was responding to the concerns raised due to the changes to existing

recognition, measurement and presentation guidance for the short duration contracts. They were

also responding to the scope guidance of 2013 which proposed the update which would apply to

all the reporting entities that were involved in the business of issuing insurance contracts (FASB

No. 2015-09, 2015). More sol, the changes were as a result of the concerns on the issues with the

required detailed disclosure.

The Potential Impact on The Financial Statements and Disclosures

The update which was provided by the FASB required relevant organizations to disclose for

annual reporting period and some of the issues which had to be indicated in the financial

statements included;

 The incurred and paid claims development information should be recorded by the

accident year, being on a net basis after risk mitigation has been done through

reinsurance and this should be for the number of years which the claim incurred typically

remain outstanding (FASB No. 2015-09, 2015).

 There should be a reconciliation of incurred and paid claims development information

with an aim of aggregating carrying amount of the liabilities for unpaid claims and claim

adjustment expenses which have separate disclosure of reinsurance (FASB No. 2015-09,

2015).
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 For any of the accident year which is presented of the incurred claims development

information, the quantitative information which outlines the claim frequency

accompanied by the methodologies which are relied on when determining the claim

frequency information should also be presented (FASB No. 2015-09, 2015).

 For any of the claims apart from the health insurance claims, the average annual

percentage payout of incurred claims either by age or they should also be presented

(FASB No. 2015-09, 2015).

Generally, all the insurance companies are required to combine or disaggregate the above

disclosures with an intent of having any useful data not becoming obscure by either the inclusion

or a large amount of irrelevant detail or the aggregation of items which tend to have

characteristics which have significantly different (FASB No. 2015-09, 2015). More so, the

amendments require the insurance companies to ensure that their financial statements disclose

information that pertains significant changes in both the assumptions and methodologies which

have been used to calculate the liability for unpaid claims.

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References

FASB No. 2015-09 (2015 May). Financial Services—Insurance (Topic 944): FASB Accounting

Standards Update on Disclosures about Short-Duration Contracts

Palmrose, Z. V., & Kinney Jr, W. R. (2018). Auditor and FASB responsibilities for representing

underlying economics—What US standards actually say. Accounting Horizons, 32(3),

83-90.