Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts — SOP 05-1[Download]

This SOP provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97.

This SOP is effective for internal replacements occurring in fiscal years beginning after December 15, 2006, with earlier adoption encouraged.

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Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts

Introduction and Background

1. Insurance enterprises may offer existing contract holders new products or modifications to existing contracts for various reasons, such as increasing administrative efficiency and improving the competitive position of the contract to enhance contract holder satisfaction and retention. For ex- ample, at the time universal life-type contracts became popular, they were often purchased as replacements for traditional life insurance contracts issued by the same enterprise. In those eases, the contract holder generally used the cash surrender value of the previous contract to make an initial premium deposit for the new, universal life-type contract.  Further, contract holders often request insurance enterprises to make changes to their existing contracts.

2. Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, refers to the replacement by an insurance enterprise of one of its traditional life insurance contracts by a universal life-type contract as an internal replacement. FASB Statement No. 97 specifies that unamortized deferred acquisition costs related to traditional life insurance contracts replaced with universal life-type contracts issued by the same insurance enterprise shall not be deferred in connection with the replacement contract.