Public companies have another major accounting shift to contemplate after the Financial Accounting Standards Board issued a proposal to revise the accounting for contracts that provide insurance.

FASB and the International Accounting Standards Board have been working jointly to attempt to produce a model for insurance accounting that would be consistent across U.S. and international rule books. U.S. Generally Accepted Accounting Principles contain a patchwork of guidance that has evolved over decades as a result of incremental changes in the market, and some of the rules conflict. IFRS contains no comprehensive standard on insurance contracts, but the IASB just issued its own proposed standard recently as well.

FASB says its proposal will apply not just to insurance companies, but to any entity that issues insurance contracts, unless they are specifically excluded from the standard. That means guarantors, service providers, and other noninsurance companies that issue product warranties, financial guarantees, performance bonds, and other similar contracts will be affected by the standard.

FASB is seeking to replace the present collection of piecemeal guidance with a comprehensive new standard that would require a current measure of insurance contracts, including updated assumptions and discounting, said FASB Chairman Leslie Seidman in a statement. “The proposed standard is intended to bring greater consistency and relevance to the accounting for contracts that transfer significant risk between parties,” she said. “The proposal would provide decision-useful information about earnings, financial position, and the drivers of performance for companies entering into these contracts.”

The proposed accounting standard establishes principles that an insurer would be expected to apply in the recognizing, measuring, presenting, and disclosing insurance contracts issued and reinsurance contracts held in its financial statements. FASB says the standard would produce information about insurance liabilities that is more useful to readers of financial statements about the nature, amount, timing, and uncertainty of cash flows related to those liabilities, not to mention the related effect on income.

FASB says the proposal would require a company to apply a “building block” approach to most life, annuity, and long-term health contracts, but a “premium allocation approach” to most property, liability, and short-term health contracts, as well as guarantees and service contracts. Under the building block approach, entities will be required to measure the liability each reporting period based on the present value of cash flows and some probability weighting of various factors within the contracts. Under the premium allocation approach, the liability would be measured based on gross cash inflows and the expected timing of claims and benefits. Under both approaches, estimates of expected cash flows would flow to net income, except for discount rate effects, which would flow to other comprehensive income.

While the Big 4 typically are quiet about new accounting proposals until their staff have parsed them and prepared formal responses internally, PwC shot out a statement on the same day FASB published its proposal. “The FASB proposal would represent a transformational change in the way that insurance contracts are measured and reported in financial statements,” said Donald Doran, national professional services financial instruments co-leader for PwC. “Under the proposed guidance, there would be changes to the earnings pattern of underwriting and net investment margins and changes in the pattern and amount of revenue. In addition, there would likely be increased income statement volatility due to the requirement to update assumptions each period. Income statement volatility would be somewhat mitigated by the requirement that the impact of changes in discount rate assumptions be recorded in other comprehensive income.”

PwC says the proposal is likely to get mixed reviews from the insurance sector. Combined with other regulatory changes affecting insurers, the new accounting standard would produce significant challenges, the firm says, requiring insurers to potentially overhaul their systems and their performance reporting. The firm says insurers and banks that will be most affected would be wise to take a close look at the proposal and provide feedback to FASB.

FASB is accepting comments on the proposal through Oct. 25.