In their joint meeting in Norwalk, Connecticut last month, the IASB and FASB affirmed an earlier decision that an “insurer should recognize all acquisition costs as an expense when incurred.  In addition, both Boards agreed that the insurer should not recognize a part of the premium as revenue (or income) at inception equal to the acquisition costs incurred. The FASB Board unanimously agreed to this decision, while the IASB Board voted 8-6 in favor of the decision.”

This decision for insurance is consistent with the decisions reached by the boards on the general revenue recognition project. However, it poses a significant shift for the insurance industry.  Although in steady state, this change will not affect net income that much, at any given point in time, it means that the acquisition of a new contract with a customer will result in a net negative impact on earnings (because acquisition costs are expensed and no revenue is recognized to offset those costs). This seems counterintuitive given that acquiring a new contract with a customer is usually a positive economic event. At least with the old approach in which acquisition costs were deferred and recognized over the expected coverage period, an insurance entity basically recognized an approximate value of obtaining a contract with the customer. Sure, we didn’t call that a contract asset on the books, but you have to admit that the deferred acquisition costs were probably a pretty good approximation of the value of that contract.

My question–I wonder if this decision for insurance represents yet another instance in which the pressure to achieve a single revenue recognition model sacrificies what is otherwise perceived as decision useful information to investors. We may soon see the same outcome with construction contracts under the proposed new revenue recognition model because the new model will force many construction contracts to delay revenue recognition until the asset is transferred to the customer (essentially a completed-contract approach). But that’s a topic for another day!