FASB Discusses Improvements to Insurance Company-Issued Long-Duration Contracts

June 21, 2018

Deliberations continued last week on the Financial Accounting Standards Board’s (“FASB”) proposed Accounting Standards Update, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The proposal aims to improve financial reporting for long-duration contracts issued by insurance companies. In discussing the proposed standard, the FASB focused on the discount rate reset upon initial adoption, affecting the liability for future policy benefits for traditional and limited-payment contracts.

The FASB decided to update the modified retrospective transition method discount rate, by which as of the transition date, an insurance company would maintain the discount rate assumption for calculating net premiums and interest accretion. Concerning balance sheets, the liability would be revalued at the present upper-medium grade fixed-income instrument yield, causing the opening accumulated other comprehensive income balance to be adjusted at the transition date.

Also agreed upon was the proposed standard’s effective date. Public entities will have to apply the amendments to fiscal years, as well as interim periods within, beginning after December 15, 2020. All other entities will have to implement the changes for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption will be allowed.

FASB staff members were also ordered to draft an Accounting Standards Update for a vote.