Insurance Insights

FASB Proposes Update to Simplify Aspects of Long-Duration Insurance Contracts

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Hot Take:

Hot Take

The Financial Accounting Standards Board provided a proposed update to the Long-Duration Insurance Contract project to reduce complexity through an optional preparer election to exclude certain long-duration contracts or legal entities that have been derecognized due to sale or disposal before the effective date of ASU No. 2018-12. The FASB has not yet finalized its decision.  A more detailed assessment follows.

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In August 2018, -the Financial Accounting Standards Board (“Board”) met and issued Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). After receiving stakeholder feedback, the board issued a proposed update on July 14, 2022, with an August 8, 2022 comment deadline. Several key points from the July update are highlighted below.

Who does this affect? The proposal applies to insurance entities that no longer have continuing involvement with the derecognized contracts or legal entities disposed of or sold.

Significant impact, narrow scope. The implementation process for ASU 2018-12 is a significant endeavor for those insurance entities impacted by the promulgation. Though narrow in scope, this proposed update to the LDTI project will simplify the transition requirement for those insurance entities that have sold blocks of individual or group products or disposed of impacted entities prior to the final ASU 2018-12 implementation dates. The proposal is intended as an optional preparer election rather than a mandatory requirement.

Reducing complexity and costs. Based on the feedback received, the board issued the update to reduce the complexity and costs associated with adopting LDTI.  Currently, the LDTI guidance must be applied retrospectively to the earliest period presented, or if an early application is elected, the beginning of the prior fiscal year. If applied as is (i.e., without this proposed change), LDTI guidance would require preparers to discuss the reason previous gains or losses have adjusted because of the implementation of a new accounting standard. The board agreed with the feedback in finding this not to be “decision-useful” data for financial statement users.

The basis for FASB’s conclusions.  A key basis for this conclusion by FASB explained that in many instances, the original resources that supported these sold/disposed contracts or entities have been transferred to the buyer and therefore are no longer maintained or would be costly to retain or recover, simply to provide information that is not particularly relevant to the preparer’s financial statement reader. This includes transferred technical personnel, supporting systems, and other pertinent records. Accordingly, the cost for preparers does not seem, in the board’s view, to justify the additional reporting.

Effective dates. After many delays in the implementation dates for LDTI, the current effective dates are:

  • Public business entities meeting the definition of an SEC filer, LDTI is effective for fiscal years beginning after December 15, 2022.
  • For all other entities, the effective date is for fiscal years beginning after December 15, 2024. The LDTI effective dates were postponed in update No. 2020-11.

Delay of Long-Term Insurance Standard