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Understand the differences between ASC 606 and ASC 944 for insurance contract compliance. Learn how to apply each standard effectively.
For most companies, recognizing revenue is guided by the five-step model in ASC 606. But the insurance industry plays by a different rulebook called ASC 944, which is built around concepts like risk transfer and long-duration contracts. This separation is straightforward until your business offers a mix of insurance products and other services. That’s when the lines can blur, creating significant compliance risks. A solid grasp of the asc 606 topic 944 framework is crucial for any finance team in this position. Here, we’ll clarify the unique purpose of each standard and how to apply them correctly.
Think of accounting standards as different rulebooks for recognizing revenue. For most companies, ASC 606 is the go-to guide. But the insurance world plays by a different set of rules. Getting these two standards mixed up can lead to compliance headaches and inaccurate financial statements. While they govern different types of contracts, they can sometimes apply to the same company, making it essential to know which one to use and when.
Understanding the line between ASC 606 and ASC 944 is the first step toward accurate reporting and a smoother audit process. It ensures you’re not just compliant but also have a clear view of your company’s financial health. Let’s break down what each standard is and how to determine which one applies to your contracts.
ASC 606 is the primary standard for recognizing revenue from contracts with customers. Its goal is to make revenue reporting consistent and transparent across different industries. However, the Financial Accounting Standards Board (FASB) recognized that insurance contracts are unique and carved out an exception for them.
That’s where ASC 944 comes in. It’s a special set of accounting rules designed specifically for insurance companies. While ASC 606 provides a broad framework for most businesses, ASC 944 addresses the specific complexities of insurance, like long-duration contracts and risk transfer. So, while a manufacturer and a software company both follow ASC 606, an insurer writing policies will turn to ASC 944.
The type of contract you’re dealing with determines which standard to follow. ASC 944 applies to core insurance contracts, including life, health, property, liability, and mortgage insurance. If the contract involves underwriting risk and providing insurance coverage, ASC 944 is your guide.
However, many insurance companies offer services that aren't strictly insurance. For example, if your company manages claims for a self-insured client, that’s considered an administrative service only (ASO) contract. These service-only contracts fall under ASC 606 because you’re being paid for a service, not for taking on insurance risk. The key is to analyze each contract's substance to apply the correct revenue recognition standard.
When you hear "insurance," you might think of one giant industry, but the accounting rules are more specific. ASC 944 doesn't apply to every policy. It focuses on contracts from insurance entities, meaning the company's nature is as important as the contract itself. Understanding which contracts fall under this guidance is the first step to compliance. If your company deals in these areas, ASC 944 is your standard for financial reporting. Let's break down the primary contract types it covers.
ASC 944 directly applies to life and health insurance contracts. This includes policies providing financial coverage for life events like death or disability, plus costs related to medical care. For companies in this sector, the standard dictates how to account for premiums, benefits, and long-term liabilities. The scope of ASC 944 guidance ensures the unique, long-duration nature of these contracts is properly reflected in financial statements.
Often called property and casualty (P&C), this is another core area governed by ASC 944. These contracts cover policyholders against loss or damage to physical assets and protect them from legal liabilities, including auto, home, and commercial policies. Unlike life insurance, these are typically short-duration contracts. ASC 944 provides specific practices for recognizing premium revenue over the policy term and accounting for claims as they are incurred.
ASC 944 also extends to title and mortgage insurance. Title insurance protects an owner or lender against losses from defects in a property title, while mortgage insurance protects a lender if a borrower defaults. These specialized products have unique revenue and claim patterns. The standard provides a clear framework for how insurers should recognize revenue and account for the expenses and potential losses from these policies.
Finally, ASC 944 governs reinsurance—essentially, insurance for insurance companies. In these agreements, one insurer covers a portion of another's losses to help manage risk exposure and maintain financial stability. The accounting is complex, involving premiums, claims, and reserves. ASC 944 outlines the proper treatment for these reinsurance contracts, ensuring their financial impact is accurately reflected.
Think of ASC 944 and ASC 606 as two different sets of instructions for recognizing revenue. While ASC 944 is the primary guide for insurance contracts, many companies offer services that fall outside its scope, which is where ASC 606 comes in. The two standards don't compete; they complement each other to ensure all revenue is accounted for correctly. The main challenge is knowing when to apply which rule, especially for mixed contracts. This creates a hybrid accounting environment where your finance team needs to be fluent in both standards to maintain compliance and provide clear, trustworthy information to stakeholders. For more helpful articles on accounting and finance, you can find additional Insights on our blog.
Many insurance companies have diversified their offerings beyond traditional policies. For instance, you might provide "administrative services only" (ASO) contracts, where you manage claims for a self-insured company without taking on the insurance risk. This ASO component is a service, not an insurance product, so its revenue must be recognized according to ASC 606. The key is to unbundle the different elements within your customer agreements. You need a clear process to separate insurance-related revenue (ASC 944) from service-related revenue (ASC 606) to ensure each is treated correctly on your financial statements.
The core difference between the standards lies in how they measure and time revenue. ASC 944 is tailored for the long-term nature of insurance, recognizing premium revenue over the life of the policy as risk is transferred. In contrast, ASC 606 uses a five-step model for other customer contracts. A key concept in ASC 606 involves making principal versus agent assessments. If your company controls a service before it's transferred to the customer, you're the principal and recognize the gross revenue. This framework is fundamentally different from ASC 944’s focus on premiums and claims.
Correctly applying both ASC 944 and ASC 606 directly impacts the integrity of your financial reports. When you accurately separate and account for each revenue stream, you create transparent statements that build trust with investors and regulators. The complexity of managing mixed contracts manually is not only time-consuming but also leaves room for error. This is where automated solutions become invaluable, ensuring your data flows seamlessly through the right integrations and that revenue is always recognized correctly. This allows your team to close the books faster and with greater confidence.
While ASC 606 provides a universal framework for revenue, ASC 944 gets into the specific, and sometimes tricky, details of the insurance industry. It’s not just a simple re-labeling of the rules; it’s a completely different approach built around the core concepts of risk, long-term obligations, and customer behavior. Unlike a straightforward sale where you exchange a product for cash, insurance involves promises about the future.
ASC 944 acknowledges this by introducing unique principles for recognizing revenue and liabilities. It forces companies to look beyond the initial premium payment and consider the entire lifecycle of a policy. This includes everything from the likelihood of a claim being filed to the changing value of money over time. Understanding these four key distinctions is the first step to getting your insurance accounting right and ensuring your financial reporting is both compliant and accurate.
At its heart, an insurance contract is all about one thing: transferring risk. ASC 944 makes this the central test for whether a contract even qualifies for insurance accounting. For a policy to fall under this standard, it must involve a "significant insurance risk." This means the insurer takes on a genuine possibility of paying out more in claims than it received in premiums due to an uncertain future event.
Think of it this way: if you sell a simple service warranty that only covers minor, predictable repairs, that might not meet the threshold. But if you’re insuring a home against a fire, you’re accepting the significant risk of a large, unexpected loss. This principle ensures that only true insurance products are accounted for under these specialized rules, separating them from other types of service contracts. This focus on risk is the fundamental building block of insurance company revenue recognition.
Insurance companies have to be part fortune-teller, part data scientist. A huge part of ASC 944 involves estimating future events based on how you expect your policyholders to behave. You can't just book a premium as revenue and call it a day; you have to set aside money for future claims in what are called "claim reserves."
These reserves are sophisticated estimates based on historical data, trends, and actuarial models. How many customers will file a claim? How long will it take them? Will they renew their policies? The answers to these questions directly impact your liabilities and, in turn, how much revenue you can recognize. Getting this right requires robust data, which is why having seamless integrations with HubiFi that pull from all your systems is so critical for accurate forecasting.
A dollar today is worth more than a dollar ten years from now. This basic financial principle, known as the time value of money, is baked directly into ASC 944. Because insurance contracts often span decades, especially in life insurance, companies must account for the fact that the money they promise to pay out in the future is worth less in today's dollars.
This is done by "discounting" the liability for future policy benefits. Insurers use a specific discount rate to calculate the present value of the money they expect to pay out down the road. This gives a much more realistic picture of the company's financial obligations right now. It ensures that the balance sheet isn't inflated with liabilities that are years or even decades away from being paid.
Under ASC 944, you don't recognize a full year's premium as revenue the moment a customer signs up. Instead, revenue is recognized as it is "earned." For a 12-month auto insurance policy, the company provides one month of coverage at a time, so it "earns" 1/12th of the premium each month. This provides a smooth and accurate reflection of the revenue generated as the service (insurance coverage) is delivered.
On the flip side are claims, which are the insurer's primary expense. When a claim is filed, it's recorded as a liability. The process of managing these incoming premiums and outgoing claims across thousands of policies is complex. Automating this process is key to closing your books quickly and accurately. If you're struggling to keep up, you can always schedule a demo with HubiFi to see how our solutions can help.
If your company operates on a global scale, you know that US GAAP isn't the only set of rules in town. While ASC 944 governs insurance contracts in the United States, the rest of the world often looks to the International Financial Reporting Standards (IFRS). The key standard for insurance here is IFRS 17, and its differences from ASC 944 can create significant reporting complexities.
Understanding these differences is the first step toward building a financial system that can handle both. It’s about creating a clear, consistent financial picture of your business, no matter where your contracts originate. Let's break down what sets these two standards apart and what it means for your operations.
The biggest distinction between ASC 944 and IFRS 17 comes down to their core philosophies. IFRS 17 uses a principles-based model that requires a more comprehensive approach to measuring revenue over the entire life of an insurance contract. It aims to create a more consistent and transparent method for financial reporting by recognizing revenue in proportion to the insurance protection provided.
In contrast, ASC 944 is generally more prescriptive, with specific rules for different types of contracts. While ASC 944 focuses on matching revenues and expenses as they are incurred, IFRS 17 introduces a contractual service margin (CSM) to represent the unearned profit of a contract, which is then recognized over the coverage period. This fundamental difference changes how and when you recognize profit.
For global insurers, juggling these different standards is a major operational challenge. Many companies already find it difficult to comply with both ASC 606 and ASC 944, and adding IFRS 17 to the mix only complicates things further. The key to managing this is a unified data strategy. When you integrate your data sources, you can streamline compliance across all relevant standards, ensuring your reporting is accurate and consistent.
Recent updates have also introduced more flexibility. For example, the Financial Accounting Standards Board (FASB) now allows an insurance entity to make an accounting policy election on a transaction-by-transaction basis. While this offers more strategic choice, it also demands a robust and agile accounting system to manage the complexity and maintain clear audit trails.
Adopting a new accounting standard is a significant project, and the move to ASC 944 is no exception. It brings a unique set of hurdles that can feel overwhelming, from wrangling data to making complex policy choices. But with a clear understanding of what to expect, you can create a solid plan to address each one. Many insurance companies find that complying with both ASC 606 and ASC 944 at the same time adds another layer of difficulty.
Think of it less as a series of problems and more as a checklist of key areas that need your attention. By focusing on these common challenges, you can ensure a smoother transition and set your team up for long-term success. Let’s walk through the four biggest hurdles you’re likely to encounter and how you can prepare for them.
Manually pulling information from various sources to meet compliance requirements is not only time-consuming but also opens the door to costly errors. The key is to streamline the process by integrating your data sources. When your CRM, billing platforms, and accounting software don't talk to each other, you're left piecing together a financial puzzle every time you close the books.
An automated revenue recognition solution with seamless integrations can connect your disparate systems to create a single source of truth. This ensures your data is consistent and accurate across the board, which not only simplifies compliance but also gives you a clearer, more reliable view of your company's financial health.
The guidance for ASC 944 offers some flexibility, allowing an insurance entity to make a policy election on a transaction-by-transaction basis. While this flexibility can be beneficial, it also adds a layer of complexity. Your team will need to make strategic decisions about which accounting policies to apply to different types of contracts and do so consistently.
This isn't a "set it and forget it" task. It requires a deep understanding of your contract portfolio and the long-term financial implications of each choice. Documenting your rationale for these decisions is crucial for internal consistency and for successfully navigating future audits. Having a clear framework for these choices will save you headaches down the road.
Certain insurance contracts include features known as market risk benefits (MRBs), which protect the policyholder from market-based losses. ASC 944 requires these features to be accounted for separately, which often results in different accounting for a market risk benefit compared to other embedded derivatives.
Identifying and correctly valuing these benefits is one of the more technical aspects of the transition. Your finance team needs to be able to distinguish these features within your contracts and apply the specific measurement and reporting rules outlined in the standard. This often requires specialized valuation models and a thorough understanding of the underlying risks involved in your policies.
A new standard means a new learning curve for everyone involved. Your team needs to be confident in their understanding of ASC 944 to apply it correctly. Comprehensive insurance training should cover the core components of the standard, including how to account for premiums, acquisition costs, claims, reserves, and premium deficiencies.
Investing in education is an investment in accuracy and efficiency. Whether through external workshops or internal training sessions, empowering your team with knowledge is fundamental to a successful transition. You can also support them with tools that automate complex calculations, allowing them to focus on strategy and analysis. For more educational resources, you can always find helpful articles on our blog.
Making the switch to ASC 944 can feel like a huge undertaking, but you can manage it smoothly with a clear, step-by-step approach. Instead of seeing it as one massive project, think of it as a series of manageable phases. A successful implementation isn't just about meeting a deadline; it's about setting up your financial processes for long-term accuracy and clarity. By breaking the work down, you can ensure your team is prepared, your systems are aligned, and your reporting is solid from day one.
The key is to move methodically from understanding the full scope of the changes to creating a detailed plan and finally, building a system for ongoing success. This approach helps you anticipate challenges, make informed decisions, and avoid last-minute scrambles. Below, we’ll walk through three essential stages for a successful ASC 944 implementation: assessing the impact, creating a roadmap, and maintaining compliance for the long haul. Each step builds on the last, creating a strong foundation for your financial reporting.
Before you can build a plan, you need to know exactly what you're working with. This first step is all about discovery. Take a close look at your existing contracts, data systems, and reporting workflows to see how they measure up to ASC 944’s requirements. For many insurance companies, complying with both ASC 606 and ASC 944 can be challenging, especially when data is scattered across different platforms.
The goal here is to identify any gaps between your current state and where you need to be. Integrating your data sources is often the most effective way to streamline compliance for both standards. By centralizing your information, you create a single source of truth that makes reporting more efficient and accurate. This initial assessment gives you the clarity needed to map out your next steps and allocate resources effectively.
With a clear understanding of the impact, you can now build your game plan. Your implementation roadmap should be a detailed guide that outlines every task, timeline, and responsibility. This is where you make critical policy decisions. For example, the latest guidance allows an insurance entity to make a policy election on a transaction-by-transaction basis, giving you some flexibility. Your roadmap should document which elections you’ll make and why.
Think of this as your project management hub. Break down the implementation into smaller phases, assign owners to each task, and set realistic deadlines. This plan should also account for the tools and technology you’ll need. Having a detailed roadmap keeps everyone on the same page and ensures you’re moving forward efficiently. For more guidance on structuring financial projects, you can find helpful insights on our blog.
Getting through the transition is a major milestone, but compliance doesn't stop there. The final step is to establish processes that ensure you stay compliant over time. ASC 944 has several key components that require ongoing attention, from how you recognize revenue to how you report financial results. Your goal is to embed these new requirements into your daily operations so they become second nature.
This involves setting up internal controls, training your team, and using technology to automate and monitor your processes. HubiFi’s solutions are designed to help insurance companies streamline their financial reporting and maintain compliance with ASC 944. By building a sustainable framework with the right integrations and automations, you can close your books faster, pass audits with confidence, and focus on making strategic decisions for your business.
The world of accounting is anything but static, and the standards for insurance are no exception. Staying on top of upcoming changes is key to keeping your financial reporting accurate and compliant. Two major shifts on the horizon involve targeted updates to ASC 944 and a broader move toward aligning with global standards. Here’s what you need to know to stay prepared.
Recent amendments to ASC 944 are already changing how insurance entities handle their contracts. One of the most significant updates gives you more flexibility, allowing you to make policy elections on a transaction-by-transaction basis. This change can help you create financial reports that are more relevant to your stakeholders. Another key revision affects how you account for market risk benefits. The new guidance requires insurers to clearly distinguish between features accounted for under ASC 944 and those that are separated. According to a technical line from EY, this change is designed to provide a clearer view of an insurance contract's financial performance.
The insurance industry is also seeing a significant push toward global alignment, mainly with the adoption of IFRS 17. This standard introduces a new model for insurance company revenue recognition that will feel quite different from the methods many currently use for short-term contracts. As companies adapt, the goal is to create more consistency in financial reporting across different countries. Beyond just revenue, IFRS 17 requires fundamental changes to how insurance contracts are measured and presented on financial statements. According to KPMG, this transition is a major step toward improving transparency and making it easier to compare financial data across the global insurance sector.
My company is in the insurance industry. Does that mean I only need to worry about ASC 944? Not necessarily. While ASC 944 is your guide for core insurance products, many companies also offer services that fall outside its scope. For example, if you manage claims for a self-insured client, that's considered an administrative service and its revenue is recognized under ASC 606. The key is to analyze each contract to see if you're taking on insurance risk (ASC 944) or simply providing a service for a fee (ASC 606).
What's the most important difference in how revenue is recognized between the two standards? The biggest difference is the trigger for recognizing revenue. Under ASC 606, revenue is typically recognized when you fulfill a specific performance obligation, like delivering a product. With ASC 944, premium revenue is recognized over the life of the policy as you provide coverage and "earn" it over time. It’s a shift from a transactional model to one based on the continuous transfer of risk.
This seems complex. What's the very first step I should take to implement ASC 944? The best place to start is with a thorough assessment. Before you can build a plan, you need a clear picture of where you stand. Review all your current contracts to identify which ones fall under ASC 944 and which fall under ASC 606. At the same time, look at your data systems to see how information flows. This initial discovery phase will reveal any gaps and give you the foundation you need to build a realistic implementation roadmap.
You mentioned "policy elections." What are those and why do they matter? A policy election is a choice you get to make about how to apply a specific part of the accounting standard. ASC 944 offers some flexibility, allowing you to choose certain accounting treatments on a contract-by-contract basis. This is important because the choices you make can affect how your financial performance is presented. It's crucial to understand your options, make strategic decisions that best reflect your business, and document them clearly for consistency and future audits.
My company has offices outside the U.S. How does ASC 944 compare to international standards? If you operate globally, you'll likely encounter IFRS 17, which is the international counterpart to ASC 944. While both govern insurance accounting, they have different core models. IFRS 17 is generally seen as more principles-based and introduces concepts like the contractual service margin to represent unearned profit. For global companies, managing both standards requires a strong, unified data strategy to ensure reporting is consistent and compliant across all regions.
Former Root, EVP of Finance/Data at multiple FinTech startups
Jason Kyle Berwanger: An accomplished two-time entrepreneur, polyglot in finance, data & tech with 15 years of expertise. Builder, practitioner, leader—pioneering multiple ERP implementations and data solutions. Catalyst behind a 6% gross margin improvement with a sub-90-day IPO at Root insurance, powered by his vision & platform. Having held virtually every role from accountant to finance systems to finance exec, he brings a rare and noteworthy perspective in rethinking the finance tooling landscape.
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