Accounting Standards Update 2018-12—Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts



On August 15, 2018, the Financial Accounting Standards Board (FASB) completed its project on the accounting for long-duration contracts issued by insurance entities by issuing the amendments in Accounting Standards Update No. 2018-12, Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.

The 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:
  1. 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.
    1. Cash flow assumptions will be reviewed—and if there is a change, updated—at least annually, with changes reflected separately in net income.
    2. Discount rate assumptions will be updated at each reporting date, with changes reflected in other comprehensive income.
  2. 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.
  3. 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.
  4. Enhanced disclosures: Several new disclosures will be required, including liability rollforwards and information about significant inputs, judgments, assumptions, and methods used in measurement. 

Effective Dates

At the June 10, 2020 Board meeting, the Board tentatively decided to defer the effective date of the amendments in Update 2018-12 as well as amend the early application transition date. Please see the Insurance Implementation—Effective Date and Early Application completed project page.

Additional Information

Post-Issuance Activities

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.

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