The International Accounting Standard Board (IASB) and the Financial Accounting Standards Board have agreed the residual margin in insurance contracts should not be locked in at inception.

A joint meeting of the two organisations in London last week looked at the difference between the premiums and cash outflows in a contract stemming from claims, both actual and forecast.

“In the exposure draft [of the insurance contracts standards], we proposed the margin would be run off over a period while the cashflows would go into the income statement,” IASB Board Member Stephen Cooper said after the meeting.

“Many people suggested we should look at this in the same way as how we deal with revenue recognition, where the margin is not locked in.”

He says this would be on the basis of what materialises at the end of the contract.

“What this means is we unlock the margin, with claims being offset against the margin so they don’t flow through immediately,” Mr Cooper said. “But we wouldn’t allow the margin to go negative.”

Ten IASB members supported the move to unlock the margin, with five voting against. The FASB members did not vote.

The IASB also discussed whether changes in the discount rate should be recognised as an adjustment to the residual margin.

Alternatively the margin could be included in profit or loss for the accounting period, but the board did see this could create an accounting mismatch and as a result no decision was made on the topic.

The meeting also looked at how acquisition costs such as advertising, software, administration and sales staff should be treated in an insurance contract.

Mr Cooper says the IASB agreed all direct costs should be included but indirect costs should be excluded.

The IASB also wants direct acquisition costs spread over a portfolio of contracts rather than treating each contract individually.

“The FASB wants to recognise acquisition costs on a contract-by-contract basis and then only on successful contracts,” he said. “The IASB decided there should be no difference between successful and unsuccessful contracts.”

How these costs will be treated will be discussed at future IASB and FASB meetings on insurance contracts next month.