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A project on risk assumed was added to the agenda for the August meeting after all members designated it as a high priority during the agenda-setting session held in April 2011 (see the minutes from the technical agenda discussion at the April 2011 meeting).
FASAB standards on risk assumed are currently limited to insurance contracts and explicit guarantees (other than loan guarantees). In order to meet the stewardship and operating performance objectives of federal financial reporting, it is important that the federal government reports all significant risks assumed, not just risks related to insurance contracts and explicit guarantees.
Why is a project on risk assumed needed?
What questions / issues does the Risk Assumed Project plan to address?
The primary objective of this project is to study the significant risks assumed by the federal government and develop (a) definitions of risk assumed, (b) related recognition and measurement criteria, and (c) disclosure and/or required supplementary information (RSI) guidance that federal agencies can apply consistently in accordance with GAAP.
Note: This project will subsume and close the Application of the Liability Definition project. The objective of the Application of the Liability Definition project was to reconsider the recognition, measurement and display of liability and expense, potential new elements/statements, and all related disclosures for commitments of the federal government that could potentially result in a net outflow of resources. In September 2007, the board decided to postpone the project until additional progress could be made in developing conceptual guidance.
HISTORY OF BOARD DELIBERATIONS (reverse chronology)
October 22-23, 2014 Board Meeting
During the October 2014 meeting the Board discussed the following items:
Borrowing Disclosure - The Board tentatively decided to require insurance programs to disclose their borrowing authority, borrowing balances, interest expense, the ability to repay the borrowing, and explain any material differences in accordance with SFFAS 1, SFFAS 5, and SFFAS 7, but will not prescribe how or where the program will place the disclosures.
Earned/Unearned Premiums - In relation to recognizing and disclosing earned and unearned premiums, the Board directed staff to reference the revenue standards available in SFFAS 7, paragraphs 36–37, as a basis for specific guidance on revenue from insurance contracts.
Claim Adjustment Expenses - In response to staff’s question about whether to include claim adjustment expenses in the insurance program liability, the Board requested additional information from the task force on how difficult it is for insurance programs to estimate these expenses and how material they are.
Liability for Premium Deficiency - After a lengthy discussion, the Board decided that, before they could determine whether (1) to separate the current SFFAS 5 insurance liability into two components—liability for unpaid claims and liability for premium deficiency, and (2) to more clearly address recognition of contingent liabilities by expanding federal GAAP for federal insurance programs, they requested an education session to learn more from the actuaries behind the estimates.
Proposed Standards - In relation to the wording for the proposed standards, staff noted that the criteria for insurance programs will most probably be moved to the Basis for Conclusion section because it did not add anything additional to the insurance program definition.
The Board requested specific edits to the proposed wording as well.
August 27-28, 2014 Board Meeting
During the August 2014 the Board approved the proposed definition, criteria, and exclusions with the following adjustments:
- Removed “other than a defaulted debt obligation” reference from the definition and adverse event criteria, and kept it only in the exclusions.
- Removed the term, “non-loan guarantees,” and added a footnote that states—Insurance programs will also include guarantee programs not designed for loan/debt guarantees
- Changed the first exclusion to read “Loan guarantee programs as defined in SFFAS 2…,” to include all programs captured in SFFAS 2.
- Removed reference to the Stafford Act in the exclusion section, for consistency with other standards, and added discretional funding as one type of assistance provided by disaster relief programs.
- Added federal self-insurance programs as an exclusion.
Staff presented the current requirements for recognizing a liability for insurance programs from SFFAS 5 and examples of agency disclosures. The Board had no major changes at this time to the insurance liability. However, the Board did agree that the use of the term “reserve for premium deficiency” was not clear and needed to be defined for consistent reporting.
Staff presented a number of items for the Board to decide what should be disclosed. The following decisions were made:
- Exchange Revenue will be disclosed by major category. Staff will identify general categories as examples. The Board also suggested disclosures about events that caused significant changes from the prior to current year amounts.
- Borrowing: Some insurance programs have authority to borrow funds. The disclosure for borrowing generated a lot of discussion among Board members because borrowing creates a liability. Board members were interested in disclosures about events creating the shortfall that led to the liability, and the insurance program’s ability to pay it back. The Board also wanted to consider disclosures about why insurance programs could not pay the borrowing back. Some members were more interested in disclosure of this descriptive information than how much was borrowed from year to year.
The Board requested staff to better define what borrowing is as it applies to insurance programs and to provide examples of borrowing disclosures from insurance and non-insurance programs to help craft a consistent disclosure requirement.
Other recommended disclosures included: acquired assets and net recoveries; recoveries; investments, reserve balances, and interest income; funds transferred to Treasury; acquisition costs; and new laws/changes in actuarial assumptions, and maximum exposure. The Board agreed that staff should include these in the main categories that were discussed under exchange revenue.
- Risk Assumed: The current risk assumed information is reported as required supplementary information (RSI). The staff believes current standards envision projections of expected cash flows. Staff explained to the Board that due to confusion around what was expected in SFFAS 5, no insurance programs were providing projections in their financial reports. However, some do provide 10 year projections in their budget reports. There are some insurance programs that provide trend information, usually going back 10 years, in their financial reports
The Board tentatively agreed not to require projections for insurance programs. They did agree that maximum exposure—the full insurance-in-force that is what the program would pay out if all contracts experienced maximum loss— would meet the objective for providing the risk assumed by the insurance programs. However, the Board did agree that the issue for projections would remain open, because they might want to address it for other types of programs in future phases of the risk assumed project.
June 25-26, 2014 Board Meeting
The risk assumed: insurance and non-loan guarantees (RAIG) project was not discussed at the June 2014 Board meeting. However, staff worked with the RAIG Task Force to determine (1) if and when a liability is met for RAIG programs, (2) how to measure and recognize the liability, and (3) categories of insurance. Staff plans on discussing the task force findings at the August 2014 Board meeting, along with edits to the definition that Board members requested from the April 2014 meeting.
April 23-24, 2014 Board Meeting
During the April 2014 Board meeting, staff presented an updated insurance/non-loan guarantee definition including criteria (characteristics) and exclusions, results from the task force comparison analysis to loan guarantee programs under the credit reform act, and next steps.
In relation to the definition, staff will continue to revise the definition to address member’s questions/concerns about:
- Distinguishing insurance/non-loan guarantee programs from loan guarantee programs.
- Use of the term “non-loan guarantees” and what value it adds.
- Clarifying the exclusion of disaster relief programs in relation to the type of compensation provided.
Staff reviewed the analysis of the task force comparison of similarities and differences with loan guarantee programs under the Federal Credit Reform Act with the Board to determine if there was any further research required. The Board was satisfied with the presented information and did not wish staff to conduct any further research on this topic.
In conclusion, staff reviewed the next steps with the Board to determine if they were complete. Members added a gap analysis as a next step to understand what is being reported now in relation to the measurement and recognition proposal that staff will work on with the task force.
March 5-6, 2014 Board Meeting
At the March 2014 Board meeting staff presented the Insurance and Non-Loan Guarantee Definition, Characteristics, and Exclusions as developed by the task force. The Board and staff would like to thank the task force for their efforts to date.
The draft definition initially presented was:
A federal insurance/guarantee program (program) is a program authorized by law to provide financial compensation due to a negative impact resulting from an adverse event. The program manages the related risk and compensation to a designated population according to the following:
- law or otherwise enforceable by law,
- related regulations,
- agency policies, or
- explicit arrangements or agreements
The Board discussed the following concerns:
- Lack of prominence of the word “risk” (in the second sentence of the definition) and asked staff to rewrite it to move to the first sentence.
- Confusion between non-loan guarantees that this standard will address and loan guarantees that are captured under the Federal Credit Reform Act in the Statement of Federal Financial Accounting Standards 2: Accounting for Direct Loans and Loan Guarantees [SFFAS 2 (as amended)].
- Staff explained that loan guarantees are addressed in the first exclusion. Therefore, the Board directed staff to also include “non-loan guarantees” in the title and definition to provide clarity.
- Clarity as to whether these programs really manage risk. Therefore, the word “manages” may not be appropriate. In updating the definition, the word “manages” was removed.
The following updated definition was developed but remains subject to further review by the Board:
A federal insurance/non-loan guarantee program (program) is authorized by law to accept all or part of the risk to financially compensate the designated population for loss incurred by an adverse event as defined by the:
- law or otherwise enforceable by law,
- related regulations,
- agency policies, or
- explicit arrangements or agreements
The Board generally agreed with the revised definition as well as the characteristics and exclusions presented in the staff memo. As staff develops the standard and new information is discovered changes are possible and will be finalized within the standard.
At the April 2014 Board Meeting staff will present an analysis of the similarities and differences between the Insurance/Non-Loan Guarantees and the Loan Guarantees.
December 18-19, 2013 Board Meeting
At the December 2013 Board meeting staff presented information collected from the following federal insurance/guarantee entities that primarily apply the Financial Accounting Standards Board’s (FASB) standards (hereafter ‘FASB GAAP’):
- Federal Deposit Insurance Corporation (FDIC)
- Pension Benefit Guarantee Corporation (PBGC)
- Farm Credit System Insurance Corporation (FCSIC)
- Overseas Private Investment Corporation (OPIC)
to assess the fit of the definition proposed in FASB’s Insurance Contracts Proposed Standards [Topic 834 , Exposure Draft (ED) – issued June 27, 2013] for federal insurance programs. To determine this, staff focused on whether the FASB proposed insurance contracts definition was suitable for federal insurance programs.
FASB Proposed Definition of an Insurance Contract:
- 834-10-55-1 An insurance contract is a contract under which one party (the issuing entity) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or its designated beneficiary if a specified uncertain future event (the insured event) adversely affects the policy holder.
Staff opined that it would be difficult to apply this definition to federal insurance programs due to their regulatory nature. Throughout the history of the United States, Congress has established laws to create federal insurance/guarantee programs to provide economic stability for the country and its citizens. Due to the regulatory nature of some such programs, the FASB proposed insurance contracts definition may be difficult to apply to federal insurance programs.
Staff recommended and the Board agreed that more research was necessary through a task force of members representing all federal/non-loan guarantee insurance programs [those that follow FASAB GAAP as well as those identified above as following FASB GAAP] to develop a general definition. The Board discussed that this definition needs to be broad enough to encompass all existing and future federal insurance/guarantee programs government-wide.
The Board is also interested in understanding the present accounting models in use today by federal insurance/non-loan guarantee programs and the related challenges. This will be a future topic for the task force.
The first risk assumed – insurance/guarantee task force met on January 23, 2014, from 9:00am to 12noon to draft a general definition for presentation at the March 2014 Board meeting. FASAB thanks the above mentioned organizations and their auditors that have worked thus far with us on our initial research. If you are interested in joining this task force, please contact Ms. Robin Gilliam.
October 23-24, 2013 Board Meeting
The risk assumed project: insurance and guarantee phase was not discussed at the October Board meeting. Staff is researching the potential impact of the FASB’s insurance contracts proposed standards (Topic 834 – issued June 27, 2013) on those federal entities that follow FASB GAAP to identify lessons learned in the federal environment. Staff plans on discussing these findings at the December 2013 board meeting.
August 28-29, 2013 Board Meeting
The Risk Assumed Project was not discussed at the August Board meeting. Staff is continuing research on the project by gathering information from federal entities on their insurance and non-loan guarantee activities.
June 19, 2013 Board Meeting
At the February meeting the Board agreed to address the risk assumed project using a phased approach given the challenges inherent in addressing such a broad topic (i.e., exposures that could result in future outflows of the federal government). Staff is researching the first phase of the project to be addressed – insurance and non-loan guarantees. At the June meeting, staff presented several questions to the Board related to reviewing the current measurement methodology in accounting for direct loans and loan guarantees to consider a similar approach for the accounting for insurance and non-loan guarantees and to the scope of the insurance and non-loan guarantee phase of the overall risk assumed project.
Question 1 related to using “insurance and guarantee program” vs. “insurance and guarantee contract” – How should “insurance and guarantee” be defined in the federal environment? Staff recommended scoping this phase of the project in the context of “federal insurance and guarantee programs” rather than contracts and initially taking a narrow approach to this phase of the project. While the Board generally agreed, several members preferred a broader principle-based approach which would allow the other phases to possibly follow similar accounting. The matter will be considered again as the definitions are developed.
Question 2 related to non-loan guarantee programs and how they should be addressed in conjunction with insurance programs. The Board agreed with staff’s recommendation to further research the underlying characteristics of non-loan guarantee programs to identify the similarities and differences between federal insurance programs and non-loan guarantee programs. The analysis would allow staff to assess the development of the overall scope of this phase and ultimately determine whether different accounting should be proposed for non-loan guarantee programs.
Question 3 related to requesting comments from federal insurance entities currently following FASB GAAP on the FASB proposed standards for insurance contracts – (e.g., what, if any, changes in their financial reporting may result from the FASB standards?). The Board agreed with staff’s recommendation to ask the four federal entities identified to respond to specific questions on FASB’s insurance contracts proposal. Staff would use those responses to identify application concerns that would be unique to a federal entity.
Question 4 related to staff assessing the conceptual similarities and differences between federal loan guarantee programs and federal insurance and non-loan guarantee programs to consider if they are similar enough to be accounted for similarly. The Board agreed with staff’s recommendation to assess the conceptual similarities and differences between federal loan guarantee programs and federal insurance and non-loan guarantee programs to evaluate if the insurance and guarantee standards should mirror those of credit reform accounting for loan guarantees.
The next steps for phase I of the project are as follows.
- Propose a definition for federal insurance and non-loan guarantee programs.
- Develop unique characteristics of federal insurance and non-loan guarantee programs.
- Research and identify federal non-loan guarantee programs and their unique characteristics.
- Follow up with those federal insurance entities currently following FASB GAAP once the FASB insurance contract exposure draft is released.
- Prepare an analysis that assesses the conceptual similarities and differences between federal loan guarantee programs and federal insurance and non-loan guarantee programs to evaluate if the insurance and guarantee standards should mirror those of credit reform accounting for loan guarantees
- Research federal reinsurance to determine if the topic should be included within the project’s scope.
April 24-25, 2013 Board Meeting
At the February meeting the Board agreed to address the risk assumed project using a phased approach given the challenges inherent in addressing such a broad topic (i.e., exposures that could result in future outflows of the federal government). Staff has begun research on the first phase of the project to be addressed – insurance and non-loan guarantees. At the April meeting, staff arranged for a presentation to the Board by the Financial Accounting Standards Board (FASB) project manager developing the new insurance contracts proposal. Ms. Jennifer Weiner, FASB Senior Practice Fellow, discussed the project’s background, definitions, project scope, recognition, and measurement models associated with the ensuing proposal.
The object of the FASB presentation was two-fold. The first objective was, in light of staff’s review of the measurement approaches currently being used by federal entities, to explore the proposed measurement approaches being considered by FASB in its insurance contracts project. Secondly, since FASAB’s current standards on insurance and guarantees were primarily based on the existing FASB standards, the Board will need to address the FASAB insurance and guarantee standards.
Ms. Weiner emphasized that a comprehensive approach is the objective for the FASB proposed guidance, as well as the convergence efforts with the International Accounting Standards Board (IASB). She also noted that FASB and IASB are not completely converged on their insurance contracts proposals. The project’s object is to increase the decision usefulness of the information about an entity’s insurance liabilities, including the nature, amount, timing, and disclosures necessary for the financial statement users (i.e., the public, investors, regulators, etc.). Comparability of entities is also an important factor in developing the insurance standards – products with similar risk, similar cash flows, similar attributes, etc. She noted that one significant change from the existing guidance is the accounting is now for risk products as opposed to simply insurance entities.
The presentation highlighted the measurement model key features:
- Updated estimates and assumptions
- Current measurement of risk
- Reflect time value of money
- Market consistent estimate
The FASB proposal includes a definition of an insurance contract – “A contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.” The proposal is not entity specific, but focuses on risks and guarantees.
The FASB proposed measurement models are the premium allocation approach (PAA) and the building block approach (BBA). The PAA would be applied to insurance contracts with a coverage period of one year or less (e.g., property, casualty, and short-term health insurance contracts) or if it is unlikely that during the period before a claim is incurred, there will be significant variability in the expected cash flows. The BBA approach would be used for insurance contracts not meeting the PAA criteria, which are usually the long-duration contracts (e.g., life, long-term health insurance, and annuity insurance contracts) when the likelihood of a claim normally increases over time.
Staff will continue its research on existing federal insurance and guarantee programs.
February 27-28, 2013 Board Meeting
During the February meeting’s technical agenda session the Board agreed to address the risk assumed project using a phased approach given the challenges inherent in addressing such a broad topic (i.e., exposures that could result in future outflows of the federal government). Insurance and non-loan guarantees will be addressed in the first phase of the project. This approach will allow development of principles for measuring and reporting risk where risk is most clearly identifiable – insurance and guarantees providing explicit indemnification to identified parties.
Tab F (PDF)
December 19-20, 2012 Board Meeting
The Risk Assumed project was not discussed at the December 2012 board meeting. Staff is continuing to research options for addressing the inconsistent and duplicative reporting on the risks assumed by insurance and guarantee programs to present to the board at a future meeting at which time members will decide whether to (1) issue a separate exposure draft on insurance and guarantees, or (2) hold out for a more comprehensive standard on all significant future outflows of the federal government.
October 24-25, 2012 Board Meeting
The Risk Assumed project was not discussed at the October 2012 board meeting. Staff is continuing to research options for addressing the inconsistent and duplicative reporting on the risks assumed by insurance and guarantee programs to present to the board at a future meeting at which time members will decide whether to (1) issue a separate exposure draft on insurance and guarantees, or (2) hold out for a more comprehensive standard on all significant future outflows of the federal government.
August 29-30, 2012 Board Meeting
At the August 29, 2012, board meeting, members agreed that staff should continue to approach the risk assumed project from a broad perspective but focus current efforts most heavily on reporting by insurance and guarantee programs. Staff will begin to develop options for addressing the inconsistent and duplicative reporting on the risks assumed by insurance and guarantee programs to present to the board at a future meeting at which time members will decide whether to (1) issue a separate exposure draft on insurance and guarantees, or (2) hold out for a more comprehensive standard on all significant future outflows of the federal government.
Tab E (PDF)
April 25-26, 2012 Board Meeting
The risk assumed project was not on the agenda at the April meeting; however, an update was provided on the project’s status. The risk assumed project is taking a broad look at all types of transactions and events that may result in future outflows as a result of the federal government’s mission, operations, and current or past actions. Staff is currently developing task forces on two explicit groupings of risk assumed: (1) commitments and obligations, including contracts, grants, and treaties and (2) insurance and guarantees. Other task forces will follow as the project progresses.
August 24-25, 2011 Board Meeting
At the August 24, 2011, board meeting, members discussed a project plan proposal from staff. Members strongly supported staff’s plan so staff will begin preliminary research on the Risk Assumed Project by developing an inventory of risk assumed by the federal government, a detailed task force plan, and a list of potential task force members.