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Journal entry — Insurance project — FASB continues redeliberating targeted improvements to the long-duration insurance contracts accounting model

Published on: Nov 08, 2017

At its meetings on October 4, 2017, and November 1, 2017, the FASB tentatively (1) reaffirmed certain aspects of its proposed ASU1 on targeted improvements to the long-duration insurance contracts accounting model and (2) changed certain aspects of the accounting model that is included in the proposed ASU.

The following aspects of the model were discussed at the two meetings:

  • Deferred acquisition costs — The Board reaffirmed its goal of simplifying the accounting for deferred acquisition costs (DAC); however, it tentatively decided that the amortization method prescribed in the proposed ASU should be replaced by the principle that an insurer should amortize DAC on a constant basis over the insurance contract’s expected life. The Board also reaffirmed that DAC should not be subject to impairment testing; rather, DAC should “be written off for actual experience in excess of expected experience, without consideration of contract profitability.”

    In addition, the Board aligned DAC transition guidance with that of the liability for future policy benefits. Thus, an insurer would apply the new DAC amortization guidance prospectively “to the existing [DAC] carrying amount at the transition date, adjusted for the removal of any related amounts in accumulated other comprehensive income.” Alternatively, an insurer could elect to apply the DAC amortization amendments retrospectively (with a cumulative catch-up adjustment to beginning retained earnings) using information about actual experience. The final ASU will require an insurer to apply the same transition method to both its DAC and its liability for future policy benefits. Furthermore, the insurer would (1) make its transition election at the same issue-year level and (2) apply that election “entity-wide for that issue year and all subsequent issue years.”
  • Participating insurance contracts — In a departure from the proposal, the Board tentatively decided to retain existing guidance on accounting for the liability for future policy benefits for participating insurance contracts; however, an insurer would still apply the proposed amortization model, noted above, to the DAC associated with these contracts.
  • Market risk benefits — The Board reaffirmed that an insurer should:
    • Measure market risk benefits at fair value.
    • Recognize changes in the fair value of market risk benefits in net income, other than the portion of the fair value change attributable to changes in instrument-specific credit risk, which would be recognized in other comprehensive income (OCI).
    • Apply the market risk benefit amendments retrospectively to all prior periods.

    Further, the Board tentatively decided to (1) expand the scope of the market risk benefit guidance to include “general account deposit (or account balance) products” and (2) allow an insurer to use hindsight when it retrospectively applies the market risk benefit amendments to prior periods.

    The November 1 meeting handout included draft revisions to reflect this broadened scope, which indicated that:

    A market risk benefit shall be recognized for a contract feature that exposes the insurance entity to other-than-nominal capital market risk that arises from either of the following:

    a. A contract feature that protects the account balance (or similar amount) from adverse capital market performance
    b. A contract feature that cause variability inthe account balance (or similar amount) in response to capital market

    A nominal risk, as explained in paragraph 944-20-15-21, is a risk of insignificant amount or a risk that has a remote probability of occurring. A contract feature is presumed to expose the insurance entity to other-than-nominal capital market risk if cash flows related to the contract feature vary more than an insignificant amount in response to capital market volatility, including changes in a market index or changes in the value of a reference portfolio. Capital market risk includes equity, interest rate, and foreign exchange risk. If a long-duration contract contains multiple market risk benefits, those market risk benefits shall be bundled together as a single, compound market risk benefit (consistent with the guidance in paragraph 815-15-25-7).

  • Presentation — The Board reaffirmed that insurers should separately present:
    • Market risk benefits balances in the statement of financial position, and changes in the fair value of such benefits in the statement of operations (other than changes attributable to changes in instrument-specific credit risk, which would be recorded in OCI).
    • The adjustment arising from updates, referred to as the “catch up” adjustment, to the measurement assumptions for the liability for future policy benefits in the statement of operations.
  • Disclosures — The Board reaffirmed all of the disclosures requirements included in the proposed ASU (other than those indicated below that were identified for possible removal). The Board also tentatively decided to:
    • Add the following disclosure requirements:
      • “Information about gross premiums.”
      • “Information about techniques [an insurer uses] to determine unobservable rates.”
      • “[Information about an insurer’s] premium deficiency testing methodology and results.”
    • Remove the following disclosures:
      • “Information about [an insurer’s] objectives, policies, and processes for managing risks, including information about hedging activity.”
      • “Ranges and weighted averages of inputs or assumptions (other than discount rates) used in liability measurement.”
      • “Weighted-average rates earned from the investment of policyholders’ account balance deposits.”
      • “Information used to conclude that no additional liability should be recognized for universal life-type contracts.”
    • Reduce the frequency of the following disclosure requirements to at least annually:
      • “Information about assumptions, changes in assumptions, and the effect of those changes.”
      • “The nature of capitalized costs.”
      • “The [insurer’s] accounting policy for sales inducements.”
      In addition, the Board indicated that its staff should seek additional feedback from constituents (particularly investors and preparers) about whether these revised disclosure requirements will satisfy stakeholders’ informational needs and whether the benefits of such disclosures will outweigh the related costs.
      The Board also decided to replace the transition disclosure requirements with the following:
      • “A rollforward of the pre-adoption transition date balances to post-adoption transition date balances.”
      • “Qualitative and quantitative information about the effect of transition adjustments.”

Next Steps

The FASB will redeliberate disclosures, effective date, and other sweep issues at future meetings.

For additional information, see the summary of tentative decisions for the FASB’s October 4 and November 1 meetings.


1 FASB Proposed Accounting Standards Update, Targeted Improvements to the Accounting for Long-Duration Contracts.

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