At a glance
In May 2014, the FASB and IASB issued their long-awaited converged standard on revenue recognition. Insurance intermediaries will be most affected by the new requirements on identifying separate performance obligations and variable consideration, such as contingent commissions and renewal commissions. Insurance intermediaries will need to consider changes that might be necessary to information technology systems, processes, and internal controls to capture new data and address changes in financial reporting.
PwC's revenue guide (RR) is a comprehensive analysis of the revenue standard. This supplement discusses some of the more significant changes for insurance intermediaries.
The revenue standard is effective for the first interim period within annual periods beginning on or after January 1, 2018 (IFRS), beginning on or after December 15, 2017 (for US GAAP public entities), and for annual reporting periods beginning after December 15, 2018 (for non-public US GAAP entities).
Intermediaries introduce the policyholder and insurer and are compensated by a fee or commission for placement/broking of an insurance policy. Services include introducing policyholders to the insurer, obtaining quotes from insurers and providing advice regarding which insurer would provide the required cover for a suitable price. Intermediaries can also earn revenue by performing a number of other services for insurers, such as underwriting, policy administration, claims processing services, loss prevention, risk management consulting, employee benefits consulting and captive management services. The amount of remuneration for these services is often contingent on the intermediary's performance. Captive management services may include business planning, regulatory compliance, financial accounting, management reporting and insurance underwriting.
Currently, under US GAAP and IFRS, insurance intermediaries recognize revenue from transactions based on the stage of completion, when the amount can be reasonably/reliably estimated and it is probable that the economic benefit will flow to the entity (IFRS) or when it is earned and realized or realizable (US GAAP). In some cases, the industry has interpreted this to be recognition of revenue upon receipt of cash. The revenue standard requires an insurance intermediary to recognize revenue as goods and services are transferred to the customer using the amount that it expects to be entitled to in exchange for the services. The new guidance could lead to an acceleration of recognition of revenue, for example, in circumstances where an intermediary is entitled to contingent or renewal commissions and there are no further implied or contractual services to be performed in the renewal periods. In other instances (for example in commercial lines of business where the intermediary performs ongoing services in addition to original placement), a portion of revenue, if material, would be recognized as those services are performed rather than at initial placement.
References to insurance intermediaries in this supplement refer to both insurance brokers and agents. In some territories a distinction is made between insurance brokers and agents. An insurance agent is an insurance company's representative within the placement process. The agent, whose primary alliance is with the insurer, can be either a third party or an employee of the insurer. In this document, references to an agent refer to third party arrangements. In contrast, an insurance broker represents the policyholder and generally has no allegiance with any one insurance carrier.
This supplement provides an initial analysis of key questions and issues facing the industry that will continue to evolve as entities address the challenges of implementation and as the joint IASB/FASB Transition Resources Group (TRG) addresses various issues. The TRG was established in 2014 to help the FASB and the IASB determine whether more implementation guidance is needed. The TRG will make no formal recommendations to the boards' or issue any guidance. The examples and related discussions are intended to highlight areas of focus to assist entities in evaluating the implications of the new standard. The new revenue standard is principles-based, requiring the application of significant judgement.
The Transition Resource Group for Revenue Recognition ('TRG') was formed by the FASB and IASB to advise the Boards on implementation challenges. The last meeting of the joint TRG was held in November 2015. The IASB does not plan to schedule further meetings, but the TRG will be available for consultation by the IASB, and the IASB will monitor any discussions that the FASB might have. The FASB TRG members met in April 2016 and the FASB has scheduled additional TRG meetings for 2016.
The IASB and FASB have both issued amendments to the revenue standard in 2016. The FASB has proposed further technical corrections to the revenue standard that it expects to finalize later in 2016.
This supplement is based on the standard issued in May 2014 and subsequently issued amendments. Preparers should monitor developments in FASB and TRG discussions, and consider the impact on accounting.
Insurance intermediaries will need to assess their contracts to determine the timing and amount of revenue to recognize under the revenue standard. The model requires a contract-based approach under which the following steps will apply:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the total transaction price.
- Allocate the total transaction price to each performance obligation in the contract.
- Recognize as revenue when (or as) each performance obligation is satisfied.
The purpose of this publication is to highlight the relevant areas for insurance intermediaries, which means that some steps may not be discussed in detail. Throughout the document we will refer to the five steps when appropriate.