At its June 6, 2018, meeting, the FASB concluded its redeliberations on its proposed Accounting Standards Update (ASU)¹ that would make targeted improvements to the accounting and disclosure model for certain long-duration insurance contracts and voted to proceed with finalizing the new standard. This action reflects the culmination of a project that has spanned almost a decade. The FASB expects to issue a final ASU later this summer (the staff’s estimate of late August is subject to change). Note that the ASU will not change the scope of ASC 944;² therefore, the amendments will apply to the insurance entities designated in that guidance.

Effective Date and Early Adoption

The Board decided that the ASU would be effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020; other entities would have to adopt the ASU in fiscal years beginning after December 15, 2021, and in interim periods within fiscal years beginning after December 15, 2022. Early adoption would be permitted for all entities as of the beginning of any fiscal year after the ASU’s issuance; such entities would also be required to apply that guidance to interim periods within that fiscal year.

Discount Rate for Transition

The Board decided to revise the modified retrospective transition method that an insurer would apply to nonparticipating traditional and limited-payment contracts. The Board agreed that as of the beginning of the earliest period presented (i.e., the transition date), an insurer would retain the discount rate assumption it used before adoption to calculate net premiums and interest accretion. For balance sheet purposes, the insurer would remeasure the liability at the current upper-medium grade fixed-income instrument yield, which would result in an adjustment to opening accumulated other comprehensive income at the transition date.

Market Risk Benefits

The FASB staff’s June 6 Board meeting handout summarizes the targeted improvements that would be included in the new ASU. The summary includes revised language for the ASU’s description of the scope of contracts or contract features that will be accounted for as market risk benefits under the amendments (shown below). The revised language was prepared in response to constituent feedback on the proposed wording that was included in the Board’s November 1, 2017, meeting handout.

30. A contract or contract feature that both provides protection to the contract holder from capital market risk and exposes the insurance entity to other-than-nominal capital market risk should be recognized as a market risk benefit.

31. In evaluating whether a contract or contract feature meets the conditions of a market risk benefit, an insurance entity should consider that:

(a) Protection refers to the transfer of a loss in (or shortfall of) the contract holder’s account balance from the contract holder to the insurance entity, with such transfer exposing the insurance entity to capital market risk that would otherwise have been borne by the contract holder (or beneficiary).

(b) Protection does not include the death benefit component of a life insurance contract (that is, the difference between the death benefit amount and the accrued account value). This condition should not be analogized or otherwise applied to an annuity or investment contract.

(c) A nominal risk is a risk of insignificant amount or a risk that has a remote probability of occurring. A market risk benefit is presumed to expose the insurance entity to other-than-nominal capital market risk if the benefit would vary more than an insignificant amount in response to capital market volatility.

Connecting the Dots A FASB member asked the staff to clarify certain aspects of the new language. The staff indicated that, although the wording is subject to additional revision, the revision was made to avoid the unintended consequences of sweeping in more features than the Board intended (e.g., variable life insurance). The staff further noted that (1) the reference to “life insurance contract” in condition (b) above referred to the product or the form of contract and (2) the guaranteed minimum living or death benefits included in variable or fixed annuity contracts still would be included in the scope of market risk benefits.

Other Items Discussed

The FASB staff shared with the Board its cost-benefit analysis for the proposed amendments, and all Board members agreed that the ASU’s benefits would outweigh its costs.

Connecting the Dots At the meeting, the Board did not further deliberate requiring the use of a retrospective “catch-up” model for updating cash flow assumptions versus a prospective method.

For additional information about this meeting and a summary of the targeted improvements, see the meeting handout or the summary of tentative decisions

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

2 FASB Accounting Standards Codification (ASC) Topic 944, Financial Services — Insurance.