FASB changes accounting for long-duration insurance contracts

FASB’s work to improve accounting for insurance contracts began 10 years ago as a comprehensive convergence project with the International Accounting Standards Board (IASB). FASB later split with the IASB on the project, and initially proposed a comprehensive new standard that would have introduced new accounting models.

After outreach to constituents, FASB decided that a more targeted approach was needed for insurance contract accounting. Investors were pleased with the accounting model for short-duration contracts, FASB Vice Chairman James Kroeker said during a telephone interview. Meanwhile, constituents said accounting for long-duration contracts did not need a complete overhaul.

“The input was … ‘We already have practice that our systems are geared around, our data collection is geared around, and our investors already understand,’ ” Kroeker said.

What investors were seeking, Kroeker said, was more transparency about how assumptions change over time given that some of these contracts have a duration of 10, 20, or even 50 years. That led to the requirement for updating liability measurement assumptions.

Meanwhile, simplifying the amortization of deferred acquisition costs (DAC) was a priority for Kroeker and the board.

“It’s much easier, I think, for investors to understand what we’re doing now with DAC,” Kroeker said. “So, I think, we really scaled back to a much more moderate set of proposals. But I think even though the finalized changes are more moderate, the impact on financial reporting is still going to be meaningful.”

In the interest of simplification and ease of implementation, the board tried to leverage existing models. In cutting the number of market risk benefits measurement models from two to one, keeping one of the existing models (fair value) was a strategy that is expected to make transition easier.

FASB decided that an insurance entity should apply the guidance on the liability for future policy benefits and deferred acquisition costs to all contracts in force based on their existing carrying amounts at the transition date and updated future assumptions, adjusted for the removal of any related amounts in accumulated other comprehensive income.

Kroeker said this decision should help with the transition because preparers won’t have to go back to 1970 or 1980 and accumulate decades worth of data to figure out how assumptions emerged.

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