Insurance project — FASB decides on approach to amortize deferred acquisition costs for long-duration insurance contracts
At its meeting yesterday, the FASB discussed three alternatives for amortizing deferred acquisition costs (DAC) for long-duration insurance contracts (including retention of current U.S. GAAP) and tentatively decided that DAC “would be amortized over the expected life of a book of contracts in proportion to the amount of insurance in force, or on a straight-line basis (in proportion to the number of contracts outstanding) if the amount of insurance in force is variable and cannot be reliably predicted or is otherwise not readily determinable.”1
Under this method, insurance entities would (1) determine the expected life of a book of contracts by considering key assumptions like mortality, morbidity, and persistency and (2) not accrue interest to the undiscounted balance of capitalized acquisition costs.
The Board believes that amortizing DAC for long-duration contracts in such a manner will reduce the complexity under U.S. GAAP, which currently prescribes different amortization methods for different products.
Next Steps
At a future meeting, the FASB will continue to deliberate updates to assumptions used to measure long-duration insurance contracts, including those used to calculate DAC.
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1 Quoted text is from the meeting handout.