The amount of reinsurance an insurer can recover should be spread over the remaining period of a contract for accounting purposes.

At a London meeting this month on insurance contracts, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) agreed a reinsurer's insurance contract liability should be treated in the same way as the release of the single or residual margin.

It was also agreed that insurers should treat cash flows stemming from premiums and ceding commissions as part of claims or benefits accounting if they are not treated as investment components in a contract.

“An insurer should treat any premium adjustments that are not loss sensitive in the same way as other changes in estimates of premiums arising from the contract,” the boards said in a joint statement.

“Any features that provide cedants with a unilateral right to pay a premium and reinstate a reinsurance contract should not be considered to be a loss-sensitive feature.”

In a separate decision, the IASB wants the cedant and the reinsurer to evaluate whether to account for the reinsurance contract using the building-block approach or the premium allocation approach.

The insurer would look at treating this with the same accounting approach as would be used with a direct insurance contract.

“The premium allocation approach would be permitted if it would produce measurements that are a reasonable proxy to those that are produced by the building-block approach,” the IASB said.

The FASB wants the building-block approach to be used “if during the period before a claim is incurred, there will be a significant change in the expectations of the net cash flows required to fulfil the contract”.

The accounting body also notes that “significant judgement is required to allocate the premium to the insurer’s obligation in each reporting period”.

Other decisions agreed to by both boards include policy loans in a contract having details of the amount of the investment component.

The boards say they will consider disclosures about the amount of policy loans taken out at a future meeting.

In a separate decision, the IASB says if a contract is modified and moved from the original portfolio allocation, the new policy should be recognised formally in the accounts.

The FASB plans to consider which additional circumstances will result in a policy not being recognised in these circumstances and if there needs to be application guidance.