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FASB proposes changes in insurance standard transition rules

Michael Cohn July 15, 2022, 11:31 a.m. EDT 2 Min Read


The Financial Accounting Standards Board is considering changes in the transition requirements for its long-duration insurance standard.

FASB issued a proposed accounting standards update Thursday to amend the transition guidance in Accounting Standards Update No. 2018-12, “Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts,” for contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the effective date.

The board originally issued the 2018 standard in an effort to improve and simplify the financial reporting requirements for long-duration insurance contracts, such as life insurance. The insurance standard was originally part of the convergence effort between FASB and the International Accounting Standards Board because U.S. GAAP was seen as having more detailed rules about accounting for insurance than International Financial Reporting Standards, but the two boards eventually went their separate ways and FASB decided to focus on changing its standards only for long-duration insurance contracts.

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut

Courtesy of GASB

The amendments in Update 2018-12 require an insurance company to apply a retrospective transition method as of the beginning of the earliest period presented, or the beginning of the prior fiscal year if early application is elected.

Some stakeholders have told FASB that applying the LDTI guidance to contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date probably wouldn’t provide enough useful information to investors and could lead to significant operability challenges for insurance entities to apply the guidance. Without an amendment to the transition guidance, an insurance business would need to reclassify part of the previously recognized gains or losses to the LDTI transition adjustment due to the adoption of a new accounting standard.

To deal with these issues, the proposed update would amend the LDTI transition guidance to permit an insurance entity to make an accounting policy election to exclude certain contracts or legal entities from applying the LDTI guidance when they have been derecognized because of a sale or disposal before the LDTI effective date and because the insurance entity has no continuing involvement with the derecognized contracts.

FASB is asking for comments on the proposed update by Aug. 8.

Separately, during a meeting Wednesday, FASB’s board members voted to draft another proposed accounting standards update for amortizing certain tax credits, such as for renewable energy. The proposal came from the Emerging Issues Task Force and would allow a proportional amortization method on a tax-credit-program-by-tax-credit-program basis. The existence of refundable tax credits would not automatically preclude an investor from applying a proportional amortization method.


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