ASU 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 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.
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.
Project on Effective Date Deferral
At the July 17, 2019 Board meeting, the Board tentatively decided to defer the effective dates of the amendments in Update 2018-12. Please see the Insurance—Effective Date project for additional information.
- Accounting Standards Update
- Press release and related introductory video
- FASB in Focus
- Understanding Costs and Benefits
After issuing new guidance, the FASB monitors implementation by assisting preparers and other practitioners in their understanding and ability to consistently apply the new guidance.
Questions about applying the new guidance can be submitted using the FASB’s Technical Inquiry System.