FASB Improves Accounting Guidance for Insurance Companies that Issue Long-duration Contracts
The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that improves financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities.
“The new ASU provides investors and other financial statement users with better and more timely and transparent information about long-term contracts issued by insurance companies,” stated FASB Chairman Russell G. Golden. “Featuring targeted improvements to the current reporting model for these contracts, it reflects the input we received from diverse insurance industry stakeholders over more than 10 years of extensive outreach.”
That outreach included more than 150 meetings with users and more than 250 meetings with preparers, auditors, industry groups, and others; 13 group meetings with 60 users; 14 conferences with more than 150 users; more than 450 comment letters from users, preparers, auditors, industry groups, and others; 13 public roundtables hosted or attended by the Board or staff; and numerous additional discussions.
To improve this area of financial reporting, the new ASU:
- Requires updated assumptions for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which are typically determined at contract inception, will now be reviewed—and, if there is a change, updated—at least annually, with the effect recorded in net income.
- Standardizes the liability discount rate. The liability discount rate will be a standardized, market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income.
- Provides greater consistency in measurement of market risk benefits. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk.
- Simplifies amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level amortization basis.
- Requires enhanced disclosures. They include rollforwards and information about significant assumptions and the effects of changes in those assumptions.
For calendar-year public companies, the changes will be effective in 2021. For all other calendar-year companies, the changes will be effective in 2022. Early adoption is permitted.
The ASU, as well as a FASB in Focus overview, an Understanding Costs and Benefits document, and an educational video, is available at www.fasb.org.