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Redefining the World of Deferred Acquisition Costs (DAC)

No doubt you have read about and gone through the exercise of familiarizing yourself with the new fair value definitions from the Financial Accounting Standards Board (FASB). Well, the FASB continues to move forward by redefining Deferred Acquisition Costs (DAC) in Accounting Standard Update (ASU) 2010 – 26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.

Why did the FASB redefine DAC?

The FASB issued this guidance because insurance companies were capitalizing a wide range of costs, and those costs varied from one company to another. Additionally, the Securities and Exchange Commission began questioning the deferral of certain costs, primarily advertising and overhead costs.

What’s changed?

The update stipulates that only acquisition costs that result from successful efforts at acquiring or renewing a contract may be capitalized. Previously, many insurance companies were capitalizing costs related to unsuccessful efforts. 

In addition, capitalization under ASU 2010 – 26 is now limited to: 

• incremental direct costs, which are those costs that result directly from, and are essential to, the insurance contract and would not have been incurred by the insurance company had the contract not occurred. Examples of such costs are broker or agent commissions, premium-related taxes, and assessments. 
• certain costs related directly to acquisition activities performed by the insurance company. These costs include underwriting, policy issuance and processing, medical and inspection, and sales force contract selling. However, for these activities you would only include the portion of an employee’s total compensation related directly to time spent performing these activities for actual acquired contracts. You would also include other costs related directly to those activities that would not have been incurred if the contract had not been acquired.  This area is where companies will really need to focus to determine proper deferrable costs. Compensation for time spent by employees for general supervision, training, and oversight would be considered indirect cost and should be expensed as incurred.
• advertising costs should be capitalized only if specifically permitted by other US GAAP guidance

What does this mean for my company?

Certainly you will need to take a new look at your deferred costs and how they were determined in the past. A time study may be needed or updated on various roles in the organization to determine proper deferrable compensation deferrals.

When should I begin looking at my DAC methodology?

Now. The guidance becomes effective for fiscal years beginning after December 15, 2011. Early adoption is allowed. Companies may adopt the guidance prospectively or retrospectively. Companies choosing retrospective adoption may find a number of challenges in implementing the guidance. 

For additional information or assistance with ASU 2010 – 26, please feel free to contact Jeff Dertz at  jdertz@BlackmanKallick.com or 312-980-3224, Jerry Hufton at  jhufton@BlackmanKallick.com or 312-980-2961, Doug Youngren at  dyoungren@BlackmanKallick.com or 312-980-2944, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.