FASB could adjust transition requirements in the insurance standard

There could be changes in the accounting requirements for long-term contracts issued by insurance companies.

The Financial Accounting Standards Board (FASB) issued a proposed update to accounting standards on July 14 that would amend the transition guidance in ASU No. 2018-12, Financial Services – Insurance (Item 944): Targeted improvements in accounting for long-term contracts (LDTI) for contracts derecognised as a result of a sale or disposal of one or a group of contracts or entities prior to the effective date of the LDTI.

The FASB issued ASU No. 2018-12 in August 2018 to improve, simplify and expand guidance issued by insurance companies on accounting for long-term contracts. The amendments to the standard require an insurance company to apply a retrospective transition method from the beginning of the earliest period presented, or from the beginning of the previous financial year if early application is elected.

But according to the FASB, some stakeholders told the Board that applying the LDTI guidance to contracts that were derecognised as a result of a sale or disposition of one or a group of contracts or entities before the LDTI became effective would likely not provide decision-relevant information for investors and other users of financial statements and could pose significant operational challenges for insurance undertakings to apply the guidance. Without a change in transition guidance, an insurance company would have to reclassify a portion of previously recognized gains or losses as a result of adopting a new accounting standard under the FASB to the LDTI transition adjustment.

The proposed ASU would amend the LDTI Transition Guidance to allow an insurance company to make an accounting policy election to exclude specific contracts or entities from the application of the LDTI Guidance when derecognised because:

  • Upon a sale or disposal prior to the Effective Date of the LDTI; and
  • The insurance company has no continuing interest in the derecognised contracts.

The comment period for this proposed ASU is August 8th.

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