With respect to an insurance contract with direct participation features, it is the applicable approach for measurement of the fulfillment cash flows (FCFs). The approach specifically prescribes treatment of changes in these cash flows driven by changes in discount rates and relevant financial variables.

Under the so-called general accounting model, all such changes are routed to the statement of comprehensive income (CI) (income and other comprehensive income). However, under the variable fee approach, the contractual service margin (CSM) is adjusted, at initial recognition, to take into consideration the changes in the variable fee, which encompasses specific changes in discount rates and other financial variables.

Contracts with direct participation features are also referred to as contracts with a variable fee.