Annual Update for Accountants and Auditors (2009-2010 Edition)

• Chapter 0 - Overview
  • Course Objectives
  • Introduction
  • Acronyms
• Chapter 1 - The U.S. GAAP Hierarchy and FASB Accounting Standards Codification™
  • Learning Objectives
  • Introduction
  • The Hierarchy of Generally Accepted Accounting Principles
    • Introduction
    • U.S. GAAP Hierarchy
    • Effective Date
    • Proposed Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting Principles.a replacement of FASB Statement No. 162
  • The FASB Accounting Standards Codification™
    • Key Items Regarding the FASB ASC
    • Population of FASB ASC
    • Essential and Nonessential Content
    • Topical Structure
    • Referencing the FASB ASC
    • A Helpful Tool
  • Questions
• Chapter 2 - Recent FASB Pronouncements
  • Learning Objectives
  • Introduction
  • Accounting for Financial Guarantee Insurance Contracts
    • Scope
    • Unearned Premium Revenue and Premium Receivable
    • Subsequent Measurement
    • Premium Revenue Recognition
    • Claim Liability
    • Disclosures
    • Effective Date and Transition
  • Business Combinations
    • Introduction
    • Scope
    • Key Terms
    • Identifying a Business Combination
    • The Acquisition Method
    • Disclosures
    • Effective Date and Transition
  • Noncontrolling Interests in Consolidated Financial Statements
    • Scope
    • FASB ASC 810, Consolidation (SFAS No. 160)
    • Noncontrolling Interest in a Subsidiary
    • Deconsolidation of a Subsidiary
    • Disclosures
    • Effective Date and Transition
  • Enhanced Disclosure Requirements for Derivative Instruments and Hedging Activities
    • Introduction
    • Summary
    • Effective Date and Transition
  • Fair Value Measurements
    • Introduction
    • Scope
    • Measurement
    • Valuation Techniques
    • Fair Value Hierarchy
    • Disclosures
    • Effective Date and Transition
  • FASB Staff Positions Relating to Fair Value Measurements
    • FSP FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13
    • FSP FAS 157-2, Effective Date of FASB Statement No. 157
    • FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active
    • Proposed FSP No. FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed
    • Proposed FSP FAS 115-a, FAS 124-a, and EITF 99-20-b . Recognition and Presentation of Other-Than-Temporary Impairments
  • The Fair Value Option for Financial Assets and Financial Liabilities
    • The Fair Value Option
    • Key Terms
    • Applying the Fair Value Option
    • Presentation of Items Measured at Fair Value
    • Disclosure Requirements
    • Application to Not-for-Profit Organizations
    • Effective Date
  • Employer's Accounting for Defined Benefit Pension and Other Postretirement Plans
    • Introduction
    • Changes to Accounting for Defined Benefit Pension and Other Postretirement Plans
    • Reporting by a Business Entity
    • Reporting by a Not-for-Profit Organization
    • Effective Dates
    • Transition
    • FSP FAS 158-1, Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to Related Staff Implementation Guides
  • Accounting for Uncertainty in Income Taxes
    • Interpretation
    • Effective Date and Transition
  • FSPs Related to Accounting for Uncertainty in Income Taxes
    • FSP FIN 48-1, Definition of Settlement in FASB Interpretation No. 48
    • FSP FIN 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises .. 2-64 Disclosures
    • Deferral of the Effective Date
  • Questions
• Chapter 3 - FSPs, EITF and Derivative Issues
  • Learning Objectives
  • Introduction
  • FASB Staff Positions
    • Introduction
    • Final FSPs
    • Proposed FSPs
  • Recent EITF Issues
    • EITF Issue No. 08-10 (Draft), Selected Statement 160 Implementation Questions
    • EITF Issue 08-9 (Draft), Milestone Method of Revenue Recognition
    • Issue 08-8, Accounting for an Instrument (or an Embedded Feature) with a Settlement Amount That Is Based on the Stock of an Entity's Consolidated Subsidiary
    • Issue 08-7, Accounting for Defensive Intangible Assets
    • Issue 08-6, Equity Method Investment Accounting Considerations
    • EITF 08-05, Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement
    • Issue 08-4, Transition Guidance for Conforming Changes to Issue No. 98-5
    • EITF 08-03, Accounting by Lessees for Nonrefundable Maintenance Deposits
    • 08-2, Lessor Revenue Recognition for Maintenance Services
    • 08-1, Revenue Recognition for a Single Unit of Accounting
  • EITF Topics
    • Topic No. D-98, Classification and Measurement of Redeemable Securities
  • Derivatives Implementation Issues
    • Proposed Issue No. C22, Scope Exceptions Related to Embedded Credit Derivatives
    • Issue No. B12, Embedded Derivatives: Beneficial Interest Issued by Qualifying Special-Purpose Entities (Revised 9/15/2008)
    • DIG Issue No. I1, Disclosures: Interaction of the Disclosure Requirements of Statement 133 and Statement 47 (Revised 4/21/2008)
    • Issue K04, Miscellaneous: Income Statement Classification of Hedge Ineffectiveness and the Component of a Derivative's Gain or Loss Excluded from the Assessment of Hedge Effectiveness (Revised 4/21/2008)
    • Issue E23, Hedging.General: Issues Involving the Application of the Shortcut Method under Paragraph 68 (Posted 1/10/2008)
  • Questions
• Chapter 4 - FASB Exposure Drafts
  • Learning Objectives
  • Introduction
  • Proposed SFAS . Not-for-Profit Organizations: Mergers and Acquisitions
    • Background
    • Tentative Conclusion
    • Introduction
    • Scope
    • Key Terms
    • The Acquisition Method
    • Determining the Acquisition Date
    • Recognizing and Measuring the Identifiable Assets Acquired and the Liabilities Assumed
    • Exceptions to the Recognition Requirements
    • Measurement Requirements
    • Exceptions to the Fair Value Measurement Requirements
    • Recognizing and Measuring either Goodwill Acquired or a Contribution Received
    • Measurement Period
    • Assessing What Is Part of the Merger or Acquisition
    • Presentation
    • Disclosures
    • Effective Date and Transition
  • Proposed SFAS . Not-for-Profit Organizations: Goodwill and Other Intangible Assets Acquired in a Merger or Acquisition
    • Introduction
    • Scope
    • Intangible Assets Other Than Goodwill
    • Goodwill
    • Reporting Unit
    • Operating Segments
    • Assigning the Assets Acquired and Liabilities Assumed to the Reporting Units
    • Determining a Reporting Unit's Primary Support
    • Applying the Qualitative Evaluation
    • Applying the Fair-Value-Based Evaluation
    • Goodwill Impairment Evaluation by a Subsidiary
    • Goodwill Impairment Evaluation When a Noncontrolling Ownership Interest in a Subsidiary Exists
    • Equity Method Goodwill
    • Financial Statement Presentation of Goodwill and Related Impairment Losses
    • Disclosures
    • Effective Date and Transition
  • Proposed SFAS . Going Concern
    • Summary
  • Proposed SFAS . Subsequent Events
    • Summary
  • Proposed FAS . Consolidated Financial Statements: Purpose and Policy
    • Introduction
    • Definition of Control
    • Implementation Guidance
    • Next Steps
  • Proposed FAS . Disclosure of Certain Loss Contingencies
    • Introduction
    • Required Disclosures
    • Tabular Reconciliation and Related Disclosures
    • Subsequent Events
    • Exemption from Disclosing Prejudicial Information
    • Effective Date
  • Proposed SFAS . Earnings per Share
    • Introduction
    • Amendments
    • Effective Date and Transition
  • Proposed SFAS . Accounting for Hedging Activities
    • Objectives
    • Hedge Effectiveness Requirements
    • Removal of Designation of Effectiveness
    • Hedged Risk
    • Measurement of Hedged Items in Fair Value Hedging Relationships
    • Measuring ad Reporting Ineffectiveness in Cash Flow Hedging Relationships
    • Disclosures
    • Effective Date and Transition
    • International Accounting Comparison
    • Alternative Views
  • Proposed SFAS . Accounting for Transfers of Financial Assets
    • Introduction
    • Objective
  • Proposed FAS . Amendments to FASB ASC 810, Consolidation [FIN No. 46(R)]
    • Reasons for Issuance
  • Questions
• Chapter 5 - FASB Projects
  • Learning Objectives
  • Introduction
  • Major Project . Conceptual Framework
    • Introduction
    • Summary
  • Preliminary Views . Conceptual Framework for Financial Reporting: The Reporting Entity
    • Summary
  • Convergence Project . Financial Statement Presentation
    • Objective
    • Phase A
    • Phase B
    • Phase C
    • Immediate Plans
  • Discussion Paper . Preliminary Views on Revenue Recognition in Contracts with Customers (December 19, 2008)
    • Introduction
    • Scope
    • Recognition
    • Measurement
    • Potential Effects on Present Practice
    • Next Steps
  • Preliminary Views . Financial Instruments with Characteristics of Equity
    • Background
    • The Basic Ownership Approach
    • The Ownership-Settlement Approach
    • The Reassessed Expected Outcomes (REO) Approach
    • The Board's Conclusion
  • Classification Examples
  • Convergence Project . Accounting for Leases
    • Status
    • Summary of Decisions to Date
  • Financial Instruments . Improvements to Recognition and Measurement
    • Project Objective
    • Reducing Complexity Comment Letter Summary
    • Exposure Draft, Accounting for Hedging Activities
  • Insurance Contracts
    • Decisions Reached to Date (as of February 25, 2009)
    • Next Steps
  • FASB Project . Emissions Allowances
    • Background
    • Next Steps
  • FASB Project . Postretirement Benefit Obligations including Pensions (Phase 2)
    • Phase 1
    • Phase 2
  • Invitation to Comment . Selected Issues Related to Assets and Liabilities with Uncertainties
    • Introduction
    • Probability and Contingencies
    • Contingent Assets
    • Contingent Liabilities
    • Probability Recognition Criterion
    • Measurement
  • FASB Project . FIN 48 Applicability to Private Entities
  • FASB Project . Technical Corrections to FASB Statements and Other U.S. GAAP Literature
  • FASB Project . Recoveries of Other-Than-Temporary Impairments (Reversals)
    • Summary
  • FASB Project . Financial Instruments: Derecognition
    • Summary
  • FASB Project . SEC Oil and Gas Disclosure
    • Summary
  • International Convergence Project . Earnings per Share
  • Income Tax Convergence Project
    • Objective
    • Topics Included
    • Next Steps
  • Valuation Resource Group
  • Questions
• Chapter 6 - AcSEC Update
  • Learning Objectives
  • Introduction
  • Technical Practice Aids
  • Audit and Accounting Guides
    • Recently Issued
    • Exposure Draft
    • Projects
  • AICPA Technical Practice Aids
    • TIS Section 1900.01, Interim Financial Information . Condensed Interim Financial Reporting by Nonissuers (Issued January 2009)
    • TIS Section 1100.15, Statement of Financial Position . Liquidity Restrictions (Issued October 2008)
    • Investment Companies-Related TPAs
    • Other TPAs
  • Questions
• Chapter 7 - U.S. GAAP and IFRS Convergence
  • Learning Objectives
  • Introduction
  • The International Accounting Standards
    • The Standards Advisory Council
    • International Accounting Standards Board
    • IASB Standards
    • International Financial Reporting Interpretations Committee
    • Memorandum of Understanding
    • IASB Work Plan . Projected Timetable as of January 2009
    • IASB Projects
  • SEC's Major Convergence Related Activities
    • Acceptance of IFRS Financial Statements
    • FASB/FAF Response to the SEC's Proposed Rule
    • SEC's Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers
    • Recent Changes in the IASC Foundation and IASB to Enhance Public Accountability
    • New SEC Chairperson
  • Questions
• Chapter 8 - New SASs, SSAEs, and Interpretations
  • Learning Objectives
  • Introduction
  • SAS No. 116, Interim Financial Information
    • Introduction
    • Amendments
    • Applicability
    • Establishing an Understanding with the Client
    • Written Representations from Management
    • Communications to Management and Those Charged With Governance
    • Effective Date
  • SAS No. 115, Communicating Internal Control Related Matters Identified in an Audit
    • Applicability
    • Definitions
    • Evaluating Deficiencies Identified as Part of the Audit
    • Communication . Form, Content, and Timing
    • Written Communications
    • Examples of Circumstances That May Be Deficiencies, Significant Deficiencies, or Material Weaknesses
    • Effective Date
  • SSAE No. 15, An Examination of an Entity's Internal Control Over Financial Reporting That Is Integrated With an Audit of Its Financial Statements
    • Applicability
    • Definitions and Underlying Concepts
    • Integrating the Examination with the Financial Statement Audit
    • Planning the Examination
    • Using a Top-Down Approach
    • Testing Controls
    • Evaluating Identified Deficiencies
    • Concluding Procedures
    • Reporting on Internal Control
    • Report Modifications
    • Subsequent Events
    • Special Topics
    • Exhibits
    • Effective Date
  • SAS and SSAE Interpretations
    • Interpretation No. 1, Use of Electronic Confirmations, Auditing Interpretation of AU Section 330 (Revised November 2008)
    • Interpretation No. 7, Reporting on the Design of Internal Control" of AT Section 101: Attest Engagements (Issued December 2008)
  • Improving the Clarity of ASB Standards
    • The Clarity Project
    • Genesis of the Project
    • The Basics
    • Clarity Drafting Conventions
    • Next Steps
    • Effective Date
    • Release Upon Approval
    • Redrafted Statements on Auditing Standards
  • SAS Audit Documentation
    • Introduction
    • Scope of This SAS
    • Nature and Purposes of Audit Documentation
    • Effective Date
    • Objective
    • Definitions
    • Requirements
    • Application and Other Explanatory Material
    • SAS No. 103 Revisions Compared to ISA 230
  • SAS The Auditor's Communication With Those Charged With Governance
    • Scope
    • Effective Date
    • Objectives
    • Definitions
    • Requirements
    • Application and Other Explanatory Material
    • Comparison of Requirements of SAS The Auditor's Communication With Those Charged With Governance (Redrafted) with Requirements of ISA 260 (Revised and Redrafted), Communication with Those Charged with Governance
  • Questions
• Chapter 9 - ASB Projects and Exposure Drafts
  • Learning Objectives
  • Introduction
  • ASB and IAASB Clarity Projects
    • The IAASB's Clarity Project
  • The ASB's International Convergence Plan
    • The ASB Plan
    • Clarity and Convergence Documents
  • Proposed Preface to Codification of Statements on Auditing Standards . Principles Governing an Audit Conducted in Accordance with Generally Accepted Auditing Standards and Proposed SAS . Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards
    • Proposed Preface
  • Proposed SAS . Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards
    • Introduction
    • Effective Date
    • Overall Objectives of the Auditor
    • Definitions
    • Requirements
    • Application and Other Explanatory Material
  • Proposed SAS . Audit Sampling (Redrafted)
    • Introduction
    • Effective Date
    • Changes from Existing Standards
  • Proposed SAS . Initial Audit Engagements Including Reaudits.Opening Balances
    • Introduction
    • Effective Date
    • Changes from Existing Standards
    • Convergence
  • Proposed SAS . Consideration of Laws and Regulations in an Audit of Financial Statements
    • Introduction
    • Effective Date
    • Changes from Existing Standards
  • Proposed SAS . Consideration of Fraud in a Financial Statement Audit (Redrafted)
    • Introduction
    • Convergence
    • Effective Date
    • Changes from Existing Standards
  • Proposed SASs . Required Supplementary Information, Other Information in Documents Containing Audited Financial Statements, and Other Information in Relation to the Financial Statements as a Whole
    • Introductions
    • Convergence
    • Effective Date
  • Required Supplementary Information
  • Other Information in Documents Containing Audited Financial Statements
  • Other Information in Relation to the Financial Statements as a Whole
  • Proposed SAS . Compliance Audits
    • Why This Proposed SAS Is Being Issued
    • What This Proposed SAS Does
  • Proposed SAS . Amendment to Statement on Auditing Standards No. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles," For Nongovernmental Entities
    • Summary
  • Proposed SAS . Audit Considerations Relating to an Entity Using a Service Organization (Redrafted)
    • Introduction
    • Effective Date
    • Changes to Existing Practice
    • Convergence
  • Proposed SSAE . Reporting on Controls at a Service Organization
    • Introduction
    • Effective Date
    • Scope
    • Affect on Existing Standards
  • Proposed Risk Assessment SASs . Summary of Significant changes
    • Proposed SAS, Audit Evidence (AU section 326)
    • Proposed SAS, Materiality in Planning and Performing an Audit (AU section 312)
    • Proposed SAS, Planning the Audit (AU section 311)
    • Proposed SAS, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AU section 314)
  • Questions
• Chapter 10 - Compilation and Review
  • Learning Objectives
  • Introduction
  • SSARS No. 18.Applicability of Statements on Standards for Accounting and Review Services
    • Introduction
    • Change in Applicability
    • Effective Date and Transition
  • SSARS No. 17.Omnibus Statement on Standards for Accounting and Review Services
    • Introduction
    • Change in Terminology
    • Compilation and Reviews: Objectives and Limitations
    • Engagement Letters
    • Definitions of Those Charged With Governance, Management, and Third Parties
    • Dating the Management Representation Letter
    • An Entity's Ability to Continue as a Going Concern
    • Subsequent Events
    • Supplementary Information
    • Analytical Procedures
  • SSARS Interpretations
    • Interpretation No. 31 of AR Section 100, Compilation and Review of Financial Statements: Accounting and Review Services Interpretations of Section 100
    • Interpretation No. 24 of AR Section 100, Reference to the Country of Origin in a Review or Compilation Report
    • Interpretation No. 30 of AR Section 100, Considerations Related to Financial Statements Prepared in Accordance With International Financial Reporting Standards and Compilations and Reviews Performed in Accordance With International Standards
  • Technical Practice Aid
    • TIS Section 9150, Compilation and Review Engagements (Issued December 2008)
  • ARSC's Current Projects
    • Reliability Project Aims to Change the Performance and Reporting of Review Engagements
    • Clarity Project
    • Requirement to Obtain Engagement Letters
    • Current Practice Issues
    • Common Peer Review Findings
  • Questions
• Chapter 11 - New Developments in Professional Ethics
  • Learning Objectives
  • Introduction
  • Recognition of the International Accounting Standards Board
  • Independence Impact of Providing FASB Accounting Standards Codification (ASC) 805, Business Combinations [SFAS No. 141(R)], Services to an Attest Client
    • Question
    • Answer
  • Interpretation 501-8 Under Rule 501: Failure to Follow Requirements of Governmental Bodies, Commissions, or other Regulatory Agencies on Indemnification and Limitation of Liability Agreements with a Client (Effective July 31, 2008)
    • Text of the Interpretation
  • Guide for Complying With Rules 102-505 (November 10, 2008)
    • Background
    • Rules to Which this Guide Applies
    • Threats and Safeguards
    • Ethical Conflict Resolution
  • Proposed Revision of ET Section 102: Definition of Firm (August 13, 2007)
    • Proposed Revised Definition of a Firm, under ET Section 92
    • Proposed New Definition of a Network under ET Section 92
    • Proposed New Definition of a Network Firm under ET Section 92
    • Proposed Interpretation 101-17, Networks and Network Firms under Rule 101
  • Questions
• Chapter 12 - PCAOB and SEC Update
  • Learning Objectives
  • Introduction
  • PCAOB Update
    • Auditing Standard No. 6 . Evaluating Consistency of Financial Statements
    • Proposed Auditing Standard . Engagement Quality Review
    • Proposed New Standards on Risk Assessment
    • New Ethics and Independence Rules
    • Communication with Audit Committees Concerning Independence
    • Other New PCAOB Guidance
  • SEC Update
    • IDEA and XBRL Initiatives
    • Final Rule Mandating Companies to Report Financial Statements Using XBRL, Interactive Data Format
    • Advisory Committee on Improvements to Financial Reporting
    • International Series Release, Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP
    • Protocols for Sharing Information on International Accounting Standards
    • Schedule for Completion of U.S.-Canadian Mutual Recognition Process Agreement
    • SEC Approves One-Year Extension for Small Businesses from Auditor Attestation Requirement in Sarbanes-Oxley Act
    • SEC Announces "21st Century Disclosure" Initiative
  • Questions
• Chapter 13 - Latest Developments

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Chapter 2 - Recent FASB Pronouncements

Learning Objectives

After studying this chapter, the participant should be able to

• Be aware of the issues in accounting for financial guarantee insurance contracts.

• Identify and account for a business combination.

• Measure and classify the noncontrolling interest in a partially owned subsidiary.

• Be familiar with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815, Derivatives and Hedging (SFAS No. 161).

• Understand the FASB's approach to fair value measurement.

• Understand the fair value option.

• Understand the new accounting requirements for defined benefit pension and other postretirement plans.

• Apply the new recognition and measurement rules related to uncertainty in income taxes.

Introduction

This chapter summarizes the following recently issued FASB Statements and Interpretations:

• FASB ASC 944, Financial Services–Insurance (SFAS No. 163)

• FASB ASC 805, Business Combinations [SFAS No. 141(R)], which revises the accounting for business combinations.

• FASB ASC 810, Consolidation (SFAS No. 160), which establishes new accounting and reporting requirements for noncontrolling interests in consolidated financial statements.

• FASB ASC 815, Derivatives and Hedging (SFAS No. 161)

• FASB ASC 820, Fair Value Measurements and Disclosures (SFAS No. 157), which establishes U.S. GAAP for determining how, not when, to measure assets and liabilities at fair value.

• FASB ASC 825, Financial Instruments (SFAS No. 159), which gives entities a choice to measure certain financial assets and financial liabilities at fair value.

• FASB ASC 715, Compensation–Retirement Benefits (SFAS No. 158), which enhances the disclosure requirements for defined benefit pension and other postretirement benefit plans.

• FASB ASC 740, Income Taxes (FIN No. 48), which creates a new recognition threshold and a measurement approach for tax positions recognized in financial statements.

Accounting for Financial Guarantee Insurance Contracts

Scope

FASB ASC 944, Financial Services–Insurance (SFAS No. 163, issued May 2008), applies to financial guarantee insurance (and reinsurance) contracts issued by entities that are included within the scope of paragraph 2 of FASB ASC 944 (paragraph 6 of SFAS No. 60) and that are not accounted for as derivative instruments.

A financial guarantee insurance contract is a contract issued by an insurance entity that provides protection to the holder of a financial obligation from a financial loss in the event of a default.

Unearned Premium Revenue and Premium Receivable

At the inception of a financial guarantee insurance contract, an insurance entity must recognize a liability for the unearned premium revenue. That liability is initially measured at the present value of the premiums due, or, if certain conditions are met, the present value of the premiums expected to be collected over the period of the financial guarantee contract. The present value should be determined using the risk-free interest rate at the inception of the contract based on the contract period unless the entity is permitted to consider prepayments.

The premium receivable is also measured using the risk-free interest rate at the inception of the contract based on the contract period unless the entity is permitted to consider prepayments. The discount amount should be accreted on the premium receivable through earnings over the same period. The period of a financial guarantee insurance contract may be less than the contract period if a homogeneous pool of assets underlying the insured financial obligation is contractually prepayable. In those cases, an insurance entity may use prepayment assumptions to determine the expected period if those prepayments are probable and subject to reasonable estimates of the timing and amount.

Subsequent Measurement

If an insurance entity uses the expected period in measuring the unearned premium revenue and the premium receivable, it must adjust the prepayment assumptions when those assumptions change.

If an insurance entity uses the contract period as the period of the financial guarantee insurance contract to measure unearned premium revenue, it should adjust the unearned premium revenue to reflect early principal payments as they occur.

Premium Revenue Recognition

An insurance entity should recognize premium revenue over the contract period in proportion to the amount of insurance protection provided. Recognition of premium revenue results in a corresponding decrease in unearned premium revenue.

Example

Example 1 on the following page is one of several examples in FASB ASC 944 (SFAS No. 162). It illustrates the recognition of premium revenue if insured principal payments are made over the period of the contract. Other examples presented in the guidance include the following:

• Insured Principal Payment Made at End of Period of Contract

• Early Retirement and Replacement of an Insured Financial Obligation Where the Same Insurance Entity Insured the New Financial Obligation

• Expected Net Cash Outflows Used to Measure Claim Liability

Claim Liability

A claim liability should be recognized by an insurance entity on a financial guarantee insurance contract when the insurance entity expects that a claim loss will exceed the unearned premium revenue for that contract based on the present value of expected net cash outflows to be paid under the insurance contract.

The recognized claim liability should be measured as the present value of expected net cash outflows to be paid under the insurance contract discounted using the current risk-free rate for the remaining period of the contract.

In periods subsequent to initial recognition, the claim liability should be updated each reporting period for changes in estimates of the discount rate and, when changes in the likelihood of default or potential recoveries occur, the expected net cash outflows.

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