Risk Assumed

Project Objective:

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 Why is a project on risk assumed needed?		What What questions / issues does the Risk Assumed Project plan to address?
Existing FASAB standards on risk assumed are limited to insurance contracts and explicit guarantees (other than loan guarantees) The federal government has a variety of responsibilities and consequently assumes a range of risks Current FASAB guidance may not result in full disclosure of the significant risk assumed by the federal government		What are the significant risks assumed by the federal government? How should those risks be defined? What are the appropriate recognition and measurement criteria for those risks? How should those risks be reported? Should current FASAB standards be revised?

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)

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.

Issue Paper for June 2013 (PDF)

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.

Issue Paper for April 2013 (PDF)

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.

Issue Paper for April 2012 (PDF)

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.

Issue Paper for August 2011 (PDF)