Community Bankers Association of Illinois

CBAI Urges FASB to Withdraw Split-Dollar Insurance Proposal

On August 4th, the Community Bankers Association of Illinois submitted a comment letter strongly opposing a Financial Accounting Standards Board ("FASB") proposal affecting split-dollar life insurance contracts purchased by banks. FASB's Emerging Issues Task Force has proposed that employers (e.g., banks) that purchase such insurance contracts must begin to accrue a liability for the benefit payable to the beneficiaries of the employee. The proposal would become effective for fiscal years beginning after December 15th of this year.

CBAI urged FASB to abandon the proposal because it is flawed in numerous ways. It ignores the fundamental fact that, by purchasing the insurance policy, the employer has shifted the financial liability from the employer to the insurer. Since the employer will never bear the burden of paying the benefit to the employee's beneficiary, it makes no sense to require the employer to account for the liability as if the insurer was not in the picture. Forcing banks that purchase such insurance contracts to recognize a liability for accounting purposes when the liability does not truthfully exist will misrepresent the true financial condition of the bank. This, in turn, could have a dramatic and negative impact on the bank's capital position.

CBAI also argued that, in the event that FASB moved forward on the proposal in some form, the effective date should be postponed indefinitely because too many issues need to be addressed. It would be unfair for banks that have purchased such insurance contracts in good faith to suddenly have to recognize a substantial liability accrual as soon as a few months from now. While CBAI urged that the proposal be scrapped entirely and that the effective date should be postponed indefinitely, we stated that at a minimum the effective date should be delayed for not less than one more year (i.e., for fiscal years beginning after December 15, 2007).

To read the comment letter submitted by CBAI, click here.

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