17 Oct Understanding Changes to Life Insurance Contracts with Cash Surrender Value

Posted at 20:14h in Latest News by 17 Oct

What Are Life Insurance Contracts with Cash Surrender Value?

Life insurance contracts with cash surrender value (CSV) are policies that provide both a death benefit and a built-up savings component. The cash surrender value (CSV) is the amount the policyholder can withdraw if they choose to cancel the policy before it matures or before the insured person passes away.

These policies are often utilized by businesses for various purposes, such as funding buy-sell agreements, ensuring key personnel, or serving as a form of long-term savings or investment.

What’s Changing in 2024?

Starting in 2024, businesses in Canada under the Accounting Standards for Private Enterprises (ASPE) will need to follow new guidelines for reporting CSV in insurance contracts. Previously, there were various methods of reporting, which sometimes led to inconsistent financial statements. The new guidelines aim to clarify how these contracts should be accounted for.

Key Changes Under the New Standard:

    1. CSV Must Be Recorded as an Asset: The CSV of an insurance policy will now be clearly recognized as an asset on the balance sheet. This change is significant as it reflects the current value that the business could access if they were to cancel the policy.
    2. Impact on Profit and Loss: The net effect of policy premiums and the change in CSV for the period will be presented. A net credit will be shown as income, while a net debit will be presented as an expense.
  • Disclose Requirements:
    1. If not separately presented on the balance sheet, businesses must disclose the aggregate carrying amount of CSV for all insurance policies and include a caption on the balance sheet; and
    2. If not separately shown on the income statement, businesses must disclose the change in CSV in the income statement caption.

What Are the Implications for Business Owners?

For private business owners, this new guideline means:

  • More Transparent Reporting: The value of any insurance contracts with CSV will now be clearly reflected in your financial statements, providing a more accurate picture of your assets.
  • Impact on Financial Statements: The inclusion of the CSV as an asset, and any associated policy loans as liabilities, may change the way your balance sheet looks. It’s important to work with your accountant to understand how this will impact your overall financial position.
  • Potential Tax and Cash Flow Considerations: Depending on how your business uses these insurance policies, there may be tax implications or effects on your cash flow. Consult your accountant or financial advisor to review your specific situation.

Most of Clearline’s clients have already been following many aspects of this guidance before it was released, so the impact may be minimal. However, here are a few steps to ensure your financial statements are compliant:

Steps to Take:

  1. Review Insurance Policies: If your business holds life insurance contracts, now is a good time to review them. Ensure that any policies with CSV are recorded on your financial statements according to the new guideline. Reach out to your Clearline representative for assistance.
  2. Consult Your Financial Team: Work with your Clearline representative to understand how this change affects your financial reporting and if any adjustments are needed moving forward. Ensure that your financial statements comply with the new standard.

In Summary

The new guideline on insurance contracts with CSV aims to bring consistency and transparency to financial reporting for private businesses under ASPE. By clearly recognizing the CSV as an asset, business owners can provide a more accurate representation of their financial health, which is essential for stakeholders such as lenders and investors. Ensuring that your financial statements align with these new rules will help your business stay compliant and maintain trust with key financial partners.

If you have any questions about how this affects your business, please reach out to your accountant or financial advisor for guidance.