FASB Improves Accounting for Long-Duration Contracts by Insurers
FASB issued amendments in the Accounting Standards Update 2018-12, thereby completing its project on the accounting for long-duration contracts issued by insurance entities. For public business entities, the new guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the new guidance will be effective for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early application is permitted.
The new guidance will not apply to policyholders, but will apply to insurance entities that issue long-duration contracts such as life insurance, disability income insurance, long-term-care insurance, and annuities. To improve this area of financial reporting, the new Accounting Standards Update:
- 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 roll-forwards and information about significant assumptions and the effects of changes in those assumptions.
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Keywords: Americas, US, Accounting, Insurance, Insurance Contracts, Accounting Standards Update, Disclosures, FASB
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