Highlights Several types of arrangement could be affected What is in and out of scope? Effective dates and next steps How could your business be affected? Related content. Use this document to help you think through the impacts for your business. Several types of arrangement could be affected Although the new revenue standard does not apply to insurance contracts, it may apply to other arrangements — such as asset management, insurance broking, pension administration, claims handling or custody services.
What is in and out of scope? However, non-insurance service contracts may fall entirely in the scope of the new standard. How could your business be affected? The new revenue standard will impact: contracts that fall entirely, or partly, in the scope of the new revenue standard; unbundling of performance obligations to provide goods or non-insurance services from insurance contracts; timing of revenue recognition for up-front fees; deferral and amortisation of costs for non-insurance contracts or components; and measurement and timing of recognition for variable consideration.
All rights reserved. Connect with us Find office locations kpmg. Want to do business with KPMG? Stay up to date with what matters to you Gain access to personalized content based on your interests by signing up today Sign up today. Rule 18 of the International Accounting Standards states that revenue must be measured at the "fair value" of the product or service that generates that revenue.
For insurance policies, the price that the insurance carrier and policyholder agree on meets the definition of "fair value. The Financial Accounting Standards Board, an industry group that establishes generally accepted accounting principles, issued Statement 60, which requires insurers to classify contracts as either short term or long term.
Short-term contracts have a fixed duration, after which the insurer can alter the terms of the agreement or cancel the policy. Insurers can recognize revenue on short-term contracts in relation to the amount of time elapsed on the agreement.
Long-term contracts have an indefinite duration and can continue as long as the insured party maintains its premium payments. Unless the insurer can demonstrate that the insured party has engaged in fraud or misrepresentation, the company must renew the policy. Insurance companies can recognize the revenue from long-term contracts when the premiums are due, whether or not they receive payment.
These claims adjudication and processing activities are performed even if the high deductible is ultimately not reached. Compensation for claims adjudication and processing below and above the deductible is either: 1 an explicit or implicit component of the policy premium; or 2 separately billed to the policyholder based on a percentage of paid or incurred losses, or as a flat charge per claim and referred to as a claims servicing charge.
The insurer is integral in developing the strategy and approach for settling a claim below or above the deductible, along with the insured or the third-party administrator if one is involved that is, whether a loss event is ultimately covered within the insurance protection provided or not. Additional activities related to the fulfillment of the insurance contract may include enrollment for group plans , provider network access, routine physicals and screenings, immunizations, preventative care and wellness benefits, transportation to facilities for treatment, and access to durable medical equipment e.
Examples of activities provided are towing cars from an accident location or changing a flat tire, which both help mitigate the risk of a further accident or damage to the car.
Conversely, in some situations claims adjudication and processing activities may not be part of the fulfillment activities of an insurance contract. For example, structures may be offered in the marketplace in which a commercial customer will purchase a high-deductible property casualty insurance contract.
Under this policy, insurance coverage may be provided only for claims above a specified deductible amount, and the customer may obtain claims adjudication and processing services from a third-party administrator oftentimes a subsidiary of another insurance group unrelated to the insurer providing the insurance coverage.
That third party would be subject to ASC for its provision of claims processing services. In these cases, the claims adjudication and processing services are not offered in conjunction with an insurance contract. As explained in paragraph BC14 of ASU , contracts offered by an insurance entity that are not within the scope of ASC , such as administrative services only contracts without any insurance element, should be accounted for under ASC An insurance entity, such as a health insurer, may enter into an administrative services-only contract and an insurance contract at the same time with the same party.
The timing of revenue recognition for brokers and agencies will be materially impacted as these entities previously recognized revenue when received contingent commissions or at the later of the billing date or policy effective date. Under ASC , the policy effective date will now be the predominant date used for the recognition of revenue related to brokerage services based on the premise that the revenue has been earned in the placement of the policy.
It will be critical for the broker or agency to identify all promises made in the contract, as revenues allocated to other performance obligations may be recognized at different times. The following are examples of typical revenue types or cash flow streams. However, it is essential the entity look to the performance obligations and not the revenue type or cash flow streams in determining the timing of revenue recognition.
The primary source of revenues for brokerage services is commissions from underwriting companies, based on a percentage of premiums paid, or fees received from clients based on an agreed level of service usually in lieu of commissions. Under ASC , the portion of these commissions and fee revenues that is allocated to the brokerage service is substantially recognized at a point in time on the effective date of the associated policies when control of the policy transfers to the client.
However, any revenues allocated to other performance obligations such as ongoing administrative support should be deferred to reflect delivery of services over the contract period. Commissions rates are fixed at the contract effective date and are generally based on premiums for insurance coverage or employee head count for employer sponsored benefit plans. Commissions depend upon a large number of factors, including the type of risk being placed, the particular underwriting enterprises demand, the expected loss experience of the particular risk of coverage, and historical benchmarks surrounding the level of effort necessary to place and service the insurance contract.
Rather than being tied to the amount of premiums, fees are most often based on an expected level of effort to provide their services. Whether a company is paid a commission or a fee for services associated with the placement of an insurance or insurance-like contract, the commission or fees are typically recognized on the effective date of the underlying insurance contract. To determine how much consideration to allocate to the placement services, an entity should determine the standalone selling price of the placement services and of each additional performance obligation identified.
One basis for determining standalone selling price is to calculate the costs to provide the services, plus an appropriate estimate of profit margin on a portfolio basis a practical expedient allowed in ASC The revenue earned under the contract, including an estimate of residual commissions, is then allocated between the placement services and the other performance obligations, if any, on a relative standalone selling price basis. Any amounts allocated to other services provided should be recognized over the period that the customer benefits from those services.
Note that the benefit period can be different than the underlying premium payment pattern of the insurance contracts. For certain consulting and advisory services, companies may recognize revenue in the period in which they provide the service or advice rather than over time. Insurance entities should consider the guidance in paragraph through when determining whether revenue should be recognized over time or at a point in time.
For management and administrative services, revenue is typically recognized ratably over the contract period consistent with the performance of obligations, most often over an annual term. Brokerages also receive additional revenues for risk selection knowledge, or administrative efficiencies. These amounts are in excess of the commission or fee revenues, and not all business with participating underwriting enterprises is eligible for contingent revenues.
The companies typically do not receive these revenues from the underwriting enterprises until the following calendar year, generally in the first and second quarters, after verification of the performance indicators outlined in the contracts. Accordingly, during each reporting period, the companies must make a best estimate of amounts earned using historical averages and other factors to project such revenues. These estimates are generally determined each period on a contract-by-contract basis where available.
In certain cases, it is impractical to assess a very large number of smaller contingent revenue contracts, so companies can utilize a historical portfolio estimate in aggregate a practical expedient as defined in ASC The ultimate contingent revenue amounts to be earned can vary from period to period especially in contracts sensitive to loss ratios and estimates might change significantly from quarter to quarter. For example, in circumstances where revenues are dependent on a full calendar year loss ratio, adverse loss experience in the fourth quarter could not only negate revenue earnings in the fourth quarter, but also trigger the need to reverse revenues previously recognized during the prior quarters.
Variable consideration is recognized when companies conclude, based on all the facts and information available at the reporting date, that it is probable that a significant revenue reversal will not occur in future periods, called the constraint rule. Administration only contracts may provide for fees to be established on a per-claim basis, under which the obligation is to process claims for a term specified within the contract.
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