Accounting Standards Update 2018-12—Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts
On August 15, 2018, the FASB completed its project on the accounting for long-duration contracts issued by insurance entities by issuing the amendments in Update 2018-12.
The new guidance will apply to insurance entities that issue long-duration contracts such as life insurance, disability income insurance, long-term-care insurance, and annuities. The new guidance will not apply to policyholders.
The amendments in Update 2018-12 will result in the following improvements:
- A more current measure of the insurance liability: The liability for future policy benefits for traditional and limited-payment contracts will be regularly refined for actual experience and updated future assumptions. Also, the liability will be discounted at an upper-medium grade (low-credit-risk) fixed-income instrument yield that reflects the characteristics of the liability, rather than the invested assets supporting the liability.
- Cash flow assumptions will be reviewed—and if there is a change, updated—at least annually, with changes reflected separately in net income.
- Discount rate assumptions will be updated at each reporting date, with changes reflected in other comprehensive income.
- A more uniform and current market-based measure of market-based options or guarantees: Market risk benefits will be measured at fair value, with the effect of changes in the insurance entity’s credit risk recognized in other comprehensive income.
- Simplified amortization of deferred acquisition costs: Deferred acquisition costs will be amortized on a constant-level basis over the expected life of the contract. Also, deferred acquisition costs will not be subject to impairment testing; instead, deferred acquisition costs will be amortized as long as the related contracts remain outstanding.
- Enhanced disclosures: Several new disclosures will be required, including liability rollforwards and information about significant inputs, judgments, assumptions, and methods used in measurement.
On November 15, 2019, the Board issued Accounting Standards Update No. 2019-09, which deferred the effective date of the amendments in Update 2018-12 for all entities. The new effective date is as follows:
- For public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies (SRCs) as defined by the SEC, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The one-time determination of whether an entity is an SRC should be based on an entity’s most recent determination as of November 15, 2019 (the issuance date of Update 2019-09), in accordance with SEC regulations. Early application of the amendments in Update 2018-12 is permitted.
- For all other entities, the new guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early application of the amendments in Update 2018-12 is permitted.
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- Press release and related introductory video
- FASB in Focus
- Understanding Costs and Benefits
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