Yesterday the FASB issued Accounting Standards Update No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The new ASU makes several amendments. One amendment of interest to the insurance industry is a clarification that all contracts, not just insurance contracts, within the scope of Topic 944 Financial Services-Insurance are excluded from Topic 606. The ASU provides the example of investment contracts within the scope of Topic 944 and accounted for in accordance with Subtopic 944-825 Financial Instruments. This change does not appear substantive. Given that Topic 606 did not supersede the guidance in Subtopic 944-825, one would have concluded that an insurance entity within the scope of Topic 944 should apply subtopic 944-825 to its investment contracts.
Background Information and Basis for Conclusions
Of more interest in the ASU are the comments in the Background Information and Basis for Conclusions. The ASU discusses contracts entered into by insurance entities that are not within the scope of Topic 944, for example administrative service contracts. Using the example of a claims processing contract without any insurance element, the ASU indicates such an arrangement should currently be accounted for under Topic 605 and would expect such an arrangement to be accounted for under Topic 606.
The ASU also discusses bifurcation. An insurance entity might have a contract with multiple elements. The ASU indicates that insurance entities should already be assessing elements of a contract to determine whether the elements are within the scope of Topic 944 and Topic 605 and that the process would be similar under Topic 606. The ASU gives specific examples of risk mitigation and cost containment activities that might relate to costs to fulfill the insurance elements and therefore fall within the scope of 944.
Here is an idea of what the decision process might look like for a contract with a customer containing multiple performance obligations.