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ASC 944-30-25-1A and ASC 944-30-25-1AA include four categories of acquisition costs that may be deferred.

ASC 944-30-25-1A

An insurance entity shall capitalize only the following as acquisition costs related directly to the successful acquisition of new or renewal insurance contracts:

  1. Incremental direct costs of contract acquisition.
  2. The portion of the employee’s total compensation (excluding any compensation that is capitalized as incremental direct costs of contract acquisition) and payroll-related fringe benefits related directly to time spent performing any of the following acquisition activities for a contract that actually has been acquired:
  1. Underwriting
  2. Policy issuance and processing
  3. Medical and inspection
  4. Sales force contract selling.
c. Other costs related directly to the insurer’s acquisition activities in (b) that would not have been incurred by the insurance entity had the acquisition contract transaction(s) not occurred.

ASC 944-30-25-1AA

The costs of direct-response advertising shall be capitalized if both of the following conditions are met:

  1. The primary purpose of the advertising is to elicit sales to customers who could be shown to have responded specifically to the advertising. Paragraph 944-30-25-1D discusses the conditions that must exist in order to conclude that the advertising's purpose is to elicit sales to customers who could be shown to have responded specifically to the advertising.
  2. The direct-response advertising results in probable future benefits. Paragraph 944-30-25-1G discusses the conditions that must exist in order to conclude that direct-response advertising results in probable future

All of the types of acquisition costs that are eligible for deferral share the attribute of being directly related to a sale. For a cost to be considered direct, it must result directly from and be essential to the contract acquisition or renewal. Certain costs incurred by an entity, such as rent, equipment, and general overhead, are considered indirect costs of contract acquisition, as these costs do not result directly from and are not essential to the contract transaction and would have been incurred regardless of whether or not the insurance policy was issued. Indirect costs must be charged to expense as incurred.
The following sections provide an overview of each of the four categories of potentially deferrable costs.

3.4.1 Incremental direct costs of a contract acquisition

A cost to successfully acquire an insurance contract must have both of the following characteristics in order to be deferred:
  • The cost results directly from, and is essential to, the contract transaction
  • The cost would not have been incurred by the insurance entity had the contract transaction not occurred
ASC 944-30-55-1 describes these costs as including the following:
  • An agent/broker commission or bonus for successful policy issuance
  • Medical and inspection fees for successful policy issuance
These costs are variable in nature and relate directly to a contract acquisition and are incremental, as the commission, bonus, or other inspection costs would not have been incurred had the policy or policies not been issued. Such costs may be deferred regardless of whether they are incurred in transactions with employees, non-employees, or other parties.
Although not specifically mentioned in the guidance, most premium taxes qualify for deferral. Premium taxes are amounts assessed on insurers by states, and are calculated based on the amount of premium paid by residents of the state to the insurance entity. Tax rates may vary by state and type of insurance entity, but are applied to the premiums collected by the insurer in determining the total tax expense incurred. By analogy, we believe excise taxes calculated based on contract sales would also be eligible for deferral.
Question IG 3-1 addresses whether a sales bonus is a direct cost.
Question IG 3-1
Insurance Company pays sales agents a $5,000 bonus upon the sale of the agent’s 100th policy. May Insurance Company defer this bonus as an incremental direct cost of contract acquisition?
PwC response
Yes. ASC 944-30-55-1 provides that an insurance entity may fully defer an agent or broker commission or bonus for successful contract acquisition or acquisitions as an incremental direct cost of contract acquisition. Although the agent must sell 100 policies in order for Insurance Company to incur this cost, the $5,000 bonus is incremental and direct to the 100th policy.

Question IG 3-2 addresses whether a bonus paid under a variable bonus structure can be deferred.
Question IG 3-2
Insurance Company pays an agent a bonus based on achieving a specified sales target in a given year (e.g., $150,000 in sales), but with the amount of the bonus varying depending on a second variable, such as the loss ratio of the contracts brought in by the agent. For example, the bonus will be $3,000 if a 90% loss ratio is achieved, $4,000 if an 80% loss ratio is achieved, and $5,000 if a 70% loss ratio is achieved. May Insurance Company defer this bonus as an incremental direct cost of acquisition?
PwC response
Probably. We view these sliding scale bonus arrangements as “dual trigger” contracts. In this case, the payment is based on sales, but the amount of the commission is partially based on another variable. We do not believe that the fact that the measurement is based in part on another variable would preclude an entity from deferring the bonus. However, in order to be deferrable, the primary driver of the bonus should be reaching the sales target, and that target should be substantive and not at such a low level as to virtually guarantee achievement.

3.4.2 Employee compensation and fringe benefits

The portion of employees’ total compensation and payroll-related fringe benefits directly related to time spent performing the following activities for which an insurance policy was issued (often referred to as “successful efforts”) is deferred:
  • Underwriting
  • Issuing and processing policies
  • Performing medical and other inspections
  • Selling insurance contracts
The portion of compensation to be deferred excludes any compensation that is otherwise deferred as an incremental direct cost of contract acquisition in ASC 944-30-25-1A(a), as discussed in IG 3.4.1. The portion of internal selling agent and underwriter fixed salaries and benefits attributable to unsuccessful efforts is expensed as incurred.
ASC 944-30-55-1C defines payroll-related fringe benefits and provides examples of such benefits.

ASC 944-30-55-1C

Payroll-related fringe benefits include any costs incurred for employees as part of the total compensation and benefits program. Examples of such benefits include all of the following:

  1. Payroll taxes
  2. Dental and medical insurance
  3. Group life insurance
  4. Retirement plans
  5. 401(k) plans
  6. Stock compensation plans, such as stock options and stock appreciation rights
  7. Overtime meal allowances.

Example IG 3-1 analyzes employee compensation costs eligible for deferral when compensation includes vacation pay.
EXAMPLE IG 3-1
Determination of employee compensation costs eligible for deferral when compensation includes vacation pay
Insurance Company has a direct sales employee with total compensation of $100,000, including vacation pay. The employee works 1,800 hours in the current year engaged only in successful direct sales activities and the employee’s remaining 200 hours are vacation time. 80% of the employee’s hours were for successful efforts after considering vacation time. What portion of this employee's compensation is eligible for deferral?
Analysis
We believe that vacation pay can be considered a payroll-related fringe benefit. However, vacation time is viewed as idle time (i.e., time employees are not actively involved in acquisition efforts), and as such, vacation time should be factored into the computation of employee successful efforts.
Therefore, the portion of the employee’s total compensation eligible for deferral as DAC would be $80,000 ($100,000 X 80% success rate).

For pension-related compensation, the components of net periodic benefit cost eligible to be deferred as part of employee compensation and payroll-related fringe benefits directly related to successful contract acquisitions is limited to the service cost component. Although this is not explicit in ASC 944, ASC 330-10-55-6A notes that the service cost component of net periodic pension cost and net periodic postretirement benefit cost is the only component directly arising from employees’ services provided in the current period and therefore is the relevant amount to be considered for deferral.
In some cases, the identification of deferrable acquisition costs is straightforward (e.g., commissions paid to the direct sales agent who negotiated the sale). However, in other cases, compensation arrangements and the various distribution systems of insurance entities (e.g., branch, independent retailer, captive agent, wholesaler) may be complex and require careful consideration to determine which costs are deferrable.
In such cases, judgment will be required to:
  • Identify whether a particular cost represents a “direct” cost of acquisition
  • Identify whether a person is an “employee” for purposes of payroll-related costs
  • Determine the portion of employee time that relates to successful versus unsuccessful efforts
Figure IG 3-1 illustrates the assessment process for determining which compensation costs are deferrable.
Figure IG 3-1
Distinguishing deferrable and non-deferrable acquisition compensation costs

3.4.2.1 Definition of an employee

The employee compensation and fringe benefits "bucket” relates solely to employee compensation and payroll-related fringe benefits; compensation paid to third parties is excluded. ASC 944-30 provides no explicit definition of "employee." In certain cases (e.g., captive agent structures), the relationship between the entity and the agent is more akin to one of an employer/employee, despite the legal form of that relationship. This requires careful consideration of the facts and circumstances. For instance, if the captive agents receive health benefits from the entity, work out of the insurance entity’s branch office, are under the control of the entity’s managing general agents, and are exclusive to the entity, then it may be appropriate to treat these agents as employees, and, therefore, a portion of the captive agents’ compensation may be deferred.

3.4.2.2 Direct versus indirect costs

As noted in IG 3.4, a cost must be directly related to a sale in order to be eligible for deferral. For a cost to be considered direct, it must result directly from and be essential to the contract acquisition or renewal.
Managerial compensation
Careful consideration of compensation paid to executives and managerial personnel who may only spend a portion of their time directly involved in the sales effort is necessary in order to appropriately identify the portion of such costs that may be deferred. In addition, in certain instances, a cost may be incremental (i.e., it varies based on sales volume), but it is not direct (e.g., it is paid to a supervisory regional sales manager who did not participate directly in an individual sale), and thus would not be eligible for deferral.
ASC 944-30-55-1G provides implementation considerations for managerial compensation.

ASC 944-30-55-1G

The portion of the total compensation of executive employees that relates directly to the time spent approving successful contracts may be deferred as acquisition costs. For example, the amount of compensation allocable to time spent on policies actually issued after approval by a contract approval committee is a component of acquisition costs.

In addition, certain employee managers may spend time directly approving sales, reviewing and approving specific contractual terms of customized contracts, as well as participating in and performing sales calls and other contract acquisition efforts and processes. Time spent on such detailed efforts may extend beyond traditional supervision of the sales force and may be more directly attributable to successful contract acquisition efforts, depending on the level of the employee manager's involvement in these efforts and processes.
A key part of the determination will focus on whether the employee manager's time was spent on more than supervision alone. If so, the portion of the employee manager's time and other expenses that can be directly linked to a specific successful policy issuance would be deferrable.
In contrast, an employee manager's time spent supervising, monitoring, and training employees is an indirect cost of contract acquisition that would be expensed as incurred. In general, we would not expect a significant portion of an employee manager's time to be directly attributable to contract acquisition efforts, unless there are unique facts and circumstances or specific types of complex or customized contracts for which the manager plays a more substantial role in the actual acquisition of the policies.
When employee managers are paid a fixed compensation, such as a salary, which covers the portion of their time spent directly on contract acquisition efforts, a determination would need to be made of the amount attributable to successful versus unsuccessful contract acquisition efforts. In addition, when employee managers are paid variable compensation, such as commissions or a bonus when the sales force that they supervise achieves a certain level of sales, a determination would need to be made of the amount attributable to contract acquisition efforts.
Question IG 3-3 addresses whether a manager’s incentive bonus is eligible for deferral.
Question IG 3-3
Insurance Company pays employee managers a $5,000 bonus upon the sale of the 100th policy by the respective sales force that the employee managers supervise. May Insurance Company defer this bonus as an incremental direct cost of contract acquisition?
PwC response
It depends. Despite the fact that the employee manager's compensation is based on sales volume, only the portion of compensation spent directly approving sales or participating in contract acquisition efforts would be deferrable. The portion of the bonus relating to indirect activities that they perform, such as training, supervision, and support, despite being incremental, would not be eligible for deferral.

Employee wholesalers
Fixed and variable compensation may be paid to employee wholesalers, whose job is to support the distribution of insurance products sold through third party "retailers," such as banks and insurance agencies. There are many types of wholesaler activities; some may involve more direct involvement in the sale of products than others. For example, direct activities may include working with a retailer to customize a product for a specific prospective policyholder, participating in sales meetings with a customer, providing detailed illustrations of how the product works for the broker to take back to the customer, or approving the contract sale.
Activities that would typically be indirect for which the related compensation would not be deferrable may include marketing campaigns, developing contract illustrations for future sales, training staff or brokers, developing relationships with brokers, and acquiring broker shelf space for the entity's products.
Variable compensation may be paid to the wholesalers based on the sales volume achieved in their particular geographic territory or product line. It is important to focus on the activities that the wholesaler is performing to determine what portion, if any, of any variable or fixed compensation is directly related to a sale. Only the portion of variable and fixed compensation directly related to the sales effort would be deferrable and, for fixed compensation, the successful efforts percentage would need to be applied. Allocating time spent on direct activities in wholesaler arrangements, as with manager arrangements, can be challenging; the guidance does not prescribe that a particular methodology be applied.
Example IG 3-2 illustrates three different ways in which employee wholesaler compensation may be attributed to successful efforts deferral.
EXAMPLE IG 3-2
Determination of employee wholesaler compensation costs eligible for deferral when compensation is comprised of both fixed and variable compensation
Insurance Company employs a wholesaler who receives both fixed and variable compensation to support the distribution of insurance products sold through the insurance entity's third party "retailers." The wholesaler performs a variety of activities, some of which relate directly to the sale of insurance products.
Variable compensation
$200,000
Fixed compensation
$50,000
Total compensation
$250,000
  • The wholesaler spent 20% of his time directly involved in specific contract sales
  • There is an 85% success rate
What amount of the wholesaler’s fixed and variable compensation is eligible for deferral by Insurance Company?
Analysis
Insurance Company needs to determine the portion of wholesaler activity that is directly related to selling, underwriting, inspecting, or issuance of the product, as opposed to indirect involvement in supporting and supervising the distribution channel. Direct means essential to the successful sale, and that the wholesaler must have had an active participation in the sale, such as participating in the sales meetings or approving the contract. Supervision and support alone do not qualify as direct and, as such, the portion of compensation relating to these efforts would not qualify for deferral. A variety of methodologies may be employed in order to apportion the wholesaler compensation costs that may be deferred.
  • Option A: Apply the 20% ratio representing the wholesaler time spent on direct sales activities to (1) the variable compensation and (2) the successful portion of fixed compensation. That is, deferred costs relating to incremental direct compensation would be 20% x $200,000 ($40,000), and deferred costs relating to fixed compensation would be 20% x ($50,000 x 85%) or $8,500, for total deferrable compensation costs of $48,500 relating to the employee wholesaler.
  • Option B: Assume that incremental direct costs under ASC 944-30-25-1A(a) are limited to costs that are 100% direct and variable (such as commissions to direct selling agents). Therefore, in situations when the employee is performing both direct and indirect sales activities, the entire compensation, including the variable component, is allocated to the employee compensation and fringe benefits "bucket" under ASC 944-30-25-1A(b). Applying the 20% ratio representing wholesaler time spent on direct sales activities to the total compensation and then applying a success factor would result in total deferrable compensation costs of $42,500 ($250,000 x 20% x 85%).
  • Option C: Assume that variable compensation is paid for direct acquisition activities and that fixed compensation is paid for indirect activities, assuming a constant rate is earned per hour for all activities. The rate assumed for specific activities would require sufficient documentation of the rationale for that rate. Assuming a 2,000-hour work year, the rate per hour would be $250,000/2000 hours, or $125 per hour. Applying that rate to the 400 hours of direct sales activity (2000 hours x 20%) would result in $50,000 of deferrable compensation. Under this method, there is no success rate applied, because the $50,000 of deferrable compensation is assumed to be only related to the variable compensation. That is, all the direct sales activity is paid through variable compensation, and the remainder of that compensation as well as all of the fixed compensation would be attributed to non-direct activities.
We believe that any of these methods would be an acceptable interpretation for determining the wholesaler compensation costs eligible for deferral. Once a methodology is defined and implemented by an insurance entity, this methodology should be consistently applied, unless facts and circumstances unique to that insurance entity support the use of a differing methodology. In none of the alternative scenarios would the $200,000, though a form of “incremental” compensation, be deferred in its entirety because the wholesaler spent only 20% of his time directly involved in acquisition efforts.

Overriding commissions to brokers and agents
Overriding commissions, also called overwriting commissions, are payments to brokers, managing general agents, or any other agents on a particular line of insurance written by other agents within a geographical area. These amounts may be separately specified in the contractual agreements in addition to the sales commission amounts due to sales agents that are deferred as incremental direct costs.
It is important that insurance entities analyze the nature of the services being provided in exchange for the overriding commission payments. Although overriding commissions may be incremental in nature, they may not be direct. Since these amounts are separate from sales commissions, it is possible that they are payments for costs associated with training, rent, general supervision, compliance, or other administration and overhead costs, which would be indirect costs of contract acquisition that would be expensed as incurred.
Commission and bonus payments inherently include amounts to compensate agents for solicitation and other indirect costs incurred by the agent. However, if the overriding commissions are not separately distinguishable from sales commissions, or are incurred in transactions with independent third parties when there is limited access to the information about the specific nature of the activities performed for those commissions, the overriding commissions are potentially deferrable. We believe entities should defer agent or broker overriding commissions and bonuses incurred in transactions with independent third parties if they are incremental direct costs of contract acquisition, or are incurred in transactions with independent third parties when there is limited access to information about the specific nature of the activities performed for that commission.

3.4.2.3 Successful versus unsuccessful contract efforts

ASC 944-30-55-1E provides implementation guidance for the determination of successful-efforts.

ASC 944-30-55-1E

The successful-efforts accounting notion utilized at an entity-wide level may result in a standard costing system that does not accurately reflect the amount of costs that may be deferred and amortized under this Subtopic. Successful acquisition efforts can be determined as a percentage of each function (for example, application, underwriting, and medical and inspection) and may be based on the percentage, adjusted for idle time and time spent on activities for which the related costs cannot be deferred, of successful and unsuccessful efforts determined for each function.

Standard costing may be used to estimate the costs to be deferred when the costs of acquisition are similar among a group of contracts, whereas actual costs may need to be identified separately in other contracts. In practice, a variety of techniques are applied to determine the costs associated with the successful acquisition of new or renewal insurance contracts. In some instances, insurers may find it sufficient to estimate costs relating to successful efforts by comparing the number of policies issued to the total number of applications processed. In other situations, entities may find that it takes more time to approve a policy than to decline coverage to a potential policyholder. In the latter situation, entities may decide that time studies focusing on the amount of time and effort an employee spent approving and issuing contracts are a better determinant of costs associated with successful contracts.
Once employee efforts are assigned, the proportional effort pertaining to “successful efforts” is applied to an employee’s compensation (i.e., salary and related compensation) in order to determine the portion of total employee compensation eligible for deferral under ASC 944-30-25-1A(b).

3.4.3 Other costs directly related to the acquisition activities

ASC 944-30-55-1A includes examples of other costs directly related to the acquisition activities.

ASC 944-30-55-1A

Examples of other costs related directly to the insurer’s acquisition activities in paragraph 944-30-25-1A(b) that would not have been incurred by the insurance entity had the acquisition contract transaction(s) not occurred include all of the following:

  1. Reimbursement of costs for air travel, hotel accommodations, automobile mileage, and similar costs incurred by personnel relating to the specified activities
  2. Costs of itemized long-distance telephone calls related to contract underwriting
  3. Reimbursement for mileage and tolls to personnel involved in on-site reviews of individuals before the contract is executed.

Costs must be directly attributable to the insurer's acquisition of a contract to be deferrable. In addition, only the portion of such costs that ultimately resulted in a successful sale is eligible for deferral.

3.4.4 Direct-response advertising costs

ASC 720-35-05-4 defines advertising.

ASC 720-35-05-4

Advertising is the promotion of an industry, an entity, a brand, a product name, or specific products or services so as to create or stimulate a positive entity image or to create or stimulate a desire to buy the entity's products or services. Advertising generally uses a form of media—such as mail, television, radio, telephone, facsimile machine, newspaper, magazine, coupon, or billboard—to communicate with potential customers.

General advertising is not an acquisition cost. Therefore, in accordance with ASC 720-35-25-1, general purpose advertising costs should be expensed either as incurred or the first time the advertising takes place.
Certain direct-response advertising costs may be deferred provided they meet the conditions outlined in ASC 944-30-25-1A. Direct-response advertising costs may be deferred if the primary purpose of the advertising is to elicit sales to customers that have responded specifically to the advertising and the direct-response advertising results in probable future benefits.

3.4.4.1 Primary purpose to elicit sales from direct response advertising

The first condition for deferring direct-response advertising is that the primary purpose of the advertising is to elicit sales from customers who can be shown to have responded specifically to the advertising. To meet this condition, the sale must be the direct result of the advertising (i.e., no other significant efforts are needed to elicit the sale). Insurance entities should consider whether the advertising campaign merely solicits potential policyholder interest or inquiry, with additional sales, underwriting, and other policy issuance efforts to be completed after the potential policyholder has initially responded to the advertising. If this is the case, the advertising campaign would not represent direct-response advertising eligible for deferral.
A significant lapse of time between the advertising activity and the ultimate sale in an environment of broad general advertising may disqualify the sale as being deemed a direct result of the advertising. Sales prices for the specific product are also necessary in the advertising to demonstrate no substantial effort is needed in addition to the solicitation.
In order to conclude that the advertising elicited the sale, ASC 944-30-25-1D requires that the insurance entity maintain documentation of responses that identify the name of the customer and the specific advertising that elicited the sale. Examples of such documentation are included in ASC 944-30-25-1D.

Excerpt from ASC 944-30-25-1D

Examples of such documentation include the following:
  1. Files indicating the customer names and the related direct-response advertisement
  2. A coded order form, coupon, or response card, included with an advertisement, indicating the customer name
  3. A log of customers who have made phone calls to a number appearing in an advertisement, linking those calls to the advertisement.

3.4.4.2 Probable future benefits of direct-response advertising

The second condition for deferring direct-response advertising costs is that such advertising will result in probable future benefits. The "probable future benefits" of direct-response advertising activities are defined in ASC 944-30-25-1F.

ASC 944-30-25-1F

The probable future benefits of direct-response advertising activities are probable future revenues arising from that advertising in excess of future costs to be incurred in realizing those revenues.

ASC 944-30-25-1P provides that the revenues utilized in determining probable future revenues are limited to primary revenues, which are revenue from sales to customers receiving and responding to the direct-response advertising. Such revenues should exclude those generated from other acquisition efforts. Probable revenues for insurance entities may include renewal premiums or fees expected to be earned over several future accounting periods. Such revenues must be able to be reliably predicted and are substantially the result of the direct-response advertising being assessed (i.e., it does not result from later significant additional direct-response advertising).
Deferral requires persuasive evidence that demonstrates that future benefits from the current advertising campaign will be similar to the results of past direct-response advertising activities that produced future benefits in accordance with ASC 944-30-25-1G. Such evidence should include verifiable historical results from past direct-response campaigns. Attributes to consider in determining whether the results will be similar to past campaigns include the nature of the current campaign vis-a-vis prior campaigns in areas such as the: (a) demographics of the targeted audience, (b) method of advertising, (c) similarities of the products offered, and (d) economic condition of the targeted audience and the marketplace in general. For example, results of a previous campaign targeted only to high-income zip codes would not represent acceptable historical evidence for a future broad-based campaign. Similarly, results of a prior campaign for automobile insurance products in New Jersey would not necessarily be considered predictive of a future campaign for automobile insurance products in Wisconsin because of different traffic levels and demographics.
The criteria for assessing probable future benefits are stringent. As such, it is unlikely that deferral would be acceptable for a recently formed entity or line of business because, in part, asset recognition assumes that the specific entity's prior operating statistics demonstrate future benefits. ASC 944-30-25-1H indicates that industry statistics are not considered objective evidence that the direct-response advertising will result in future benefits in the absence of a reporting entity’s operating history. The operating history for other products or services may only be used if it can be demonstrated to have a high degree of correlation to the product or service being evaluated.

3.4.4.3 Direct-response advertising – basis of measurement

Unlike the requirement in ASC 944-30-25-1A for deferrable acquisition costs to be related directly to the successful acquisition of insurance contracts, the entire cost of a qualifying advertising campaign can be deferred into direct-response advertising costs in accordance with ASC 944-30-25-1J. The direct-response advertising campaign is undertaken with the expectation that not all targets will enter an insurance contract but that the benefits created by the customers who do will justify the total advertising spend. As such, the cost of the qualifying advertising campaign for all prospective customers, not only the cost related to the portion of the potential customers that are expected to respond to the advertising, are deferred.
Since deferred advertising costs are subsequently accounted for as DAC for classification and amortization purposes, the deferred advertising costs are amortized over the initial contract period.

3.4.4.4 Distinguishing direct-response advertising and sales efforts

Question IG 3-4 addresses the accounting for call center costs.
Question IG 3-4
Some insurance entities may have sales call centers in which employees contact or receive phone calls from prospective and existing policyholders in an effort to acquire or renew insurance policies.
Are costs of call centers considered part of an insurance entity’s direct-response advertising costs or other contract acquisition costs?
PwC response
Although the entity may be able to determine which of the placed calls result in new or renewed insurance contracts and these may result in future benefits, we believe that generally these efforts should be considered employee sales costs rather than direct-response advertising. Therefore, generally, the entity should analyze the compensation and other costs incurred for the sales call centers to determine their eligibility under the deferral requirements in ASC 944-30-25-1A.
Some insurance entities may also choose to have call centers receive responses to direct-response advertising. Whether these costs are deferrable depends on the relationship between the advertising campaign and the efforts and activities conducted by the entity's call center. If the entity's call center receives phone calls in response to specific qualified direct-response advertising, the entity's call center costs associated with administering the campaign may be considered a direct response advertising cost.

3.4.5 DAC application examples of compensation arrangements

Example IG 3-3, Example IG 3-4, and Example IG 3-5 provide interpretive guidance on the determination of the portion of employee compensation that may be deferred when compensation costs are comprised of fixed salaries, variable commission, payroll-related fringe benefits, or a combination thereof.
EXAMPLE IG 3-3
Determination of employee compensation costs eligible for deferral when total compensation is fixed salaries
Insurance Company pays employee sales agents a $100,000 fixed salary. Insurance Company has performed various analyses, including time studies, and determined the following information with regard to three employee agents:
Time attributed to successful contract acquisition efforts
Fixed salary
Agent 1
55%
$100,000
Agent 2
85%
$100,000
Agent 3
75%
$100,000
The time attributable to successful contract acquisition efforts excludes time spent on activities unrelated to the acquisition of insurance policies and idle time. The employee agents receive no other payroll fringe benefits. What amount is deferrable for each agent?
Analysis
Insurance Company should first identify any incremental direct costs of contract acquisition. Employee sales agent compensation is a direct acquisition cost. However, the $100,000 fixed salary is not an incremental contract acquisition cost because Insurance Company will pay this amount regardless of whether any insurance policies are issued.
Next, Insurance Company should determine the portion of each agent’s total compensation and fringe benefits (excluding any compensation that is deferred as incremental direct costs of contract acquisition, which in this example is none) directly related to time spent selling insurance contracts. This is accomplished by applying each agent’s percentage of time attributable to successful efforts to each agent’s eligible fixed compensation.
This analysis is illustrated as follows:
Agent 1
Agent 2
Agent 3
Fixed salary
$100,000
$100,000
$100,000
Time attributed to successful efforts
55%
85%
75%
Compensation cost attributable to successful efforts (deferrable)
$55,000
$85,000
$75,000
EXAMPLE IG 3-4
Determination of employee compensation costs eligible for deferral when compensation is comprised of fixed salaries and variable commission
Insurance Company pays its employee sales agents the greater of a $100,000 fixed salary or a variable commission, defined as 25% of annual premiums for insurance policies sold. Insurance Company has performed various analyses, including time studies, and determined the following information with regard to three of its employee agents:
Time attributed to successful contract acquisition efforts
Fixed salary
Variable commission amount
Agent 1
55%
$100,000
$80,000
Agent 2
85%
$100,000
$150,000
Agent 3
75%
$100,000
$120,000
The time attributable to successful contract acquisition efforts excludes time spent on activities unrelated to the acquisition of insurance policies and idle time. The employee agents receive no other payroll fringe benefits. What amount is deferrable for each agent?
Analysis
Insurance Company should first identify the incremental direct costs of contract acquisition. Employee sales agent compensation, including fixed salary and variable commission amounts, is a direct acquisition cost. However, the $100,000 fixed salary is not an incremental contract acquisition cost because Insurance Company will pay this amount regardless of whether any insurance policies are issued. In contrast, the commission amounts paid above the $100,000 fixed salary are incremental, because Insurance Company would not have incurred costs over $100,000 if the employee agents had not successfully acquired the contracts over the specified sales threshold. Since the variable commission amounts in excess of the fixed salary are incremental direct costs, these may be deferred.
Next, Insurance Company should determine the portion of the employee agents' total compensation and fringe benefits (excluding any compensation that is deferred as incremental direct costs of contract acquisition) directly related to time spent selling insurance contracts. This is accomplished by applying each employee agent’s percentage of time attributable to successful efforts to each agent’s eligible compensation. This amount (i.e., fixed compensation) does not include any of the incremental direct costs attributable to the variable commission amounts that may be deferred.
This analysis is illustrated as follows:
Agent 1
Agent 2
Agent 3
Fixed salary (1)
$100,000
$100,000
$100,000
Time attributed to successful efforts
55%
85%
75%
Fixed compensation cost attributable to successful efforts (2)
$55,000
$85,000
$75,000
Variable commission (25% of premiums)
$80,000
$150,000
$120,000
Incremental direct compensation - amount of variable commission in excess of fixed salary (3)
N/A
$50,000
$20,000
Deferrable compensation costs [(2)+(3)]
$55,000
$135,000
$95,000
Accordingly, for agent 2, Insurance Company would record total employee compensation expenses of $15,000 (total compensation of $150,000 less $135,000 deferred costs) in its income statement and $135,000 of DAC on the balance sheet. In subsequent reporting periods, this asset would be amortized to income as an acquisition cost expense.
EXAMPLE IG 3-5
Determination of employee compensation costs eligible for deferral when compensation is comprised of variable commission and fringe benefits
Insurance Company pays an employee sales agent a variable sales-based commission of $80,000, as well as $20,000 of other payroll-related fringe benefits for medical and dental insurance and 401(k) plan contributions. The entity has determined that the sales force, of which this agent is a member, is successful 90% of the time it spends directly acquiring new or renewal policies. What portion of the total cost incurred by Insurance Company related to this agent's compensation is eligible for deferral under the guidance in ASC 944-30?
Analysis
Insurance Company should first identify the incremental direct costs of contract acquisition. The terms of the sales-based commission arrangement require Insurance Company to compensate the agent for each contract acquired on a contract-by-contract basis. In other words, the agent is only compensated for acquired contracts. As such, the entire variable sales-based commission of $80,000 is an incremental direct cost of contract acquisition and may be deferred because Insurance Company would not have incurred the $80,000 sales-based commission if the entity had not successfully acquired the contracts to earn this amount.
Next, Insurance Company should determine the portion of the agent's total compensation (excluding any compensation that is deferred as incremental direct costs of contract acquisition) and payroll-related fringe benefits directly related to time spent selling insurance contracts that have actually been acquired. In this fact pattern, the payroll-related fringe benefits that should be deferred by Insurance Company are $18,000 ($20,000 * 90%), representing the successful efforts portion of these costs. This amount does not include any of the incremental direct costs attributable to the sales-based commission amount, which was determined to be deferrable in its entirety. Therefore, $98,000 of this agent's total compensation and payroll-related fringe benefits of $100,000 is eligible for deferral under ASC 944-30.

3.4.6 DAC – initial recognition and measurement

Incurred acquisition costs that meet the criteria for deferral in ASC 944-30-25-1A through ASC 944-30-25-1AA are deferred and amortized into acquisition expenses in future periods. As required by ASC 944-30-30-2, acquisition costs, including future contract renewal costs, should not be deferred or amortized before the incurrence of those costs.

3.4.7 Non-deferrable acquisition costs

In accordance with ASC 944-720-25-2, acquisition costs of new and renewal business that are not deferred because they do not meet the criteria for deferral in ASC 944-30-25-1A through ASC 944-30-25-1AA and certain indirect costs are required to be charged to expense as incurred. Additionally, certain costs are required to be charged to expense as incurred, such as those relating to investments, general administration, policy maintenance costs, product development, market research, and general overhead, in accordance with ASC 944-40-30-15.
ASC 944-30-55-1F describes other types of acquisition costs that would fail to meet any of the categories of deferrable costs.

ASC 944-30-55-1F

All other contract acquisition-related costs, including costs related to activities performed by the insurer for soliciting potential customers (except direct-response advertising capitalized in accordance with paragraph 944-30-25-1AA), market research, training, and administration, should be charged to expense as incurred. Employees’ compensation and fringe benefits related to those activities, unsuccessful contract acquisition efforts, and idle time should be charged to expense as incurred. Administrative costs, rent, depreciation, and all other occupancy and equipment costs are considered indirect costs and should be charged to expense as incurred.

Unsuccessful contract acquisition efforts are related to the non-incremental time and other costs incurred that do not result in the issuance of policies. For example, although time and travel costs may be incurred in selling insurance policies, the insurer will not issue a policy to every individual or group solicited. The costs associated with these unsuccessful solicitations are not deferrable.
Idle time represents the time employees are not actively involved in performing underwriting, issuing and processing, performing medical and other inspections, and selling insurance contracts. Idle time can be caused by many factors, including lack of work, training, delays in workflow, and equipment failure. Idle time can be measured through the establishment of standard costs, time studies, ratios of productive and nonproductive time, and other methods.
Pursuant to ASC 944-30-55-1B, costs for software dedicated to contract acquisition, including the associated amortization expenses, are not eligible for deferral as DAC, since these costs would have been incurred regardless of whether or not the insurance policy is issued. The guidance in ASC 985, Software, should be considered in determining the accounting treatment for software costs.

3.4.7.1 Non-deferrable costs for certain long-duration contracts

For long-duration contracts and, in practice, investment contracts, acquisition costs, such as commissions and premium taxes that vary in a constant relationship to premiums or insurance in force, are recurring in nature, or tend to be incurred in a level amount from period to period, may not be deferred in accordance with ASC 944-30-25-4. Instead, these costs should be considered maintenance or other period costs and should be charged to expense in the period incurred.
Additionally, trail commissions that are calculated as a percent of account balance are typically not deferrable. However, for premium-based commissions on universal life insurance products that have flexible premiums, we believe that even constant percentage of premium commissions may be deferrable because the premium payments are not level and recurring; they are at the discretion of the policyholder.

3.4.7.2 Non-deferrable costs – exclusivity arrangements

An insurance entity may enter into a relationship with a retailer, or other party, in which the insurance entity pays an upfront amount in exchange for exclusive rights to the retailer’s customers and distribution channels to sell the insurance entity’s products (e.g., warranty contracts). At the time the agreement is signed with the retailer, there are no contracts that have been entered into with the retailer’s customers. Under ASC 944-30, an insurance entity may only defer acquisition costs relating to the successful acquisition of new or renewal insurance contracts. As these payments are made in connection with entering into an exclusive relationship with the retailer, before the insurance entity has entered into any insurance contracts with customers, and are not refundable based on the volume of any insurance contracts subsequently negotiated, the payment does not meet the definition of a deferrable insurance acquisition cost. However, in certain instances, if specified criteria are met, it may be appropriate to conclude that the payment for the exclusivity arrangement represents an identifiable intangible asset accounted for under ASC 350-30. In other fact patterns—for example, if the upfront payment is conditional upon future sales—it may represent a prepaid commission.
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