By Wayne S. Upton, Jr.

Published by the Financial Accounting Standards Board, 32 pages

Review by John F. Burke, CPA, The CPA Journal

What's a long-duration contract? Despite the plain meaning of the words, I had no idea because the term was associated with statements dealing with insurance accounting and that's another world for me.

There must be a lot more out there like me because the FASB issued a primer described as an introduction to the three accounting models used by life insurance enterprises in the U.S. Included in the group to be educated are members of the FASB as the document was originally developed as briefing materials for the Board. It was subsequently revised and expanded for use by a working group for international standard setters.

The three accounting models are covered by three FASB pronouncements and one AICPA SOP. The introduction includes some definitions of the terminology and structure used in the insurance industry. Illustrations used to explain the three models are based on an example portfolio or "book" of 10,000 similar policies, all sold to 35 year old nonsmokers. The pronouncements and models covered are as follows:

* SFAS No. 60, Accounting and Reporting by Insurance Enterprises. The accounting model used is the premium method and is used to cover
traditional long-duration insurance contracts, which by definition include most life insurance contracts, require performance of services over an extended period, and are not usually subject to cancellation by the insurer. This statement is one of a series of statements extracted from AICPA audit and accounting guides, in this case Audits of Stock Life Insurance Companies.

* SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SFAS No. 60 was not suitable for the flexible arrangements included in new universal life-type contracts. Hence the introduction of a retrospective or source of earnings accounting method in SFAS No. 97.

* SFAS No. 120, Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts, and SOP 95-1, Accounting for Certain Insurance Activities of Mutual Life Insurance Enterprises. Mutual life insurance enterprises were exempted from the requirements of SFASs 60 and 97. SFAS No. 120 made them subject to both pronouncements except for contracts that meet two conditions involving dividends. Contracts that meet these conditions are covered by the accounting explained in the SOP. Stock life insurance companies having contacts meeting these two conditions are permitted to use the SOP accounting. The accounting model is a hybrid of the two previous models with the benefit liability based on a net level premium reserve.

It is interesting to observe that in one case, SFAS No. 60, the FASB incorporated and elevated the guidance in an AICPA pronouncement, while 60 pronouncements later it returned the task of developing detailed guidance to an AICPA pronouncement.

Anyone interested in insurance accounting, or even only curious, will find the primer useful. The examples are extensive and the writing is not typical dry explanation. I now know what a long duration contract is but I must admit some of the rest leaves me somewhat confused. But, as the author points out at the end, Franz Kafka was an insurance accountant and he wrote books that are very hard to understand. *