Proposed changes to accounting for long-duration insurance contracts
FINANCIAL REPORTING INSIGHTS |
The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The proposed ASU is intended to improve financial reporting for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities, by:
- Improving the timeliness of recognizing changes in the liability for future policy benefits. The proposed ASU would require an insurance entity to update (a) the assumptions used to measure future cash flows at least annually (or more frequently) and (b) the discount rate assumption at each reporting date. The provision for risk of adverse deviation and premium deficiency (or loss recognition) testing would be eliminated. The determination of whether to establish a liability in addition to an account balance for annuitization, death or other insurance benefits would be performed at least annually (or more frequently) rather than only at contract inception.
- Eliminating the usage of an asset rate (that is, an insurance company’s expected investment yield) to discount liability cash flows. Instead, the proposed ASU would require expected future cash flows to be discounted at a high-quality fixed-income instrument yield that maximizes the use of market observable inputs.
- Simplifying and improving the accounting for certain options or guarantees in variable products (such as guaranteed minimum death, accumulation, income and withdrawal benefits) by requiring those benefits to be measured at fair value instead of using two different measurement models. The portion of any change in fair value attributable to a change in the instrument-specific credit risk would be recognized in other comprehensive income.
- Simplifying the amortization of deferred acquisition costs. Deferred acquisition costs currently amortized in proportion to premiums, gross profits or gross margins would instead be amortized in proportion to the amount of insurance in force, or on a straight-line basis if the amount of insurance in force over the expected term of the related contract cannot be reasonably estimated. Deferred acquisition costs would not be subject to impairment testing.
- Increasing transparency by improving the effectiveness of disclosures. The proposed ASU would require an insurance entity to provide disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities, and deferred acquisition costs. The proposed ASU also would require an insurance entity to disclose quantitative and qualitative information about significant inputs, judgments and assumptions used in measurement, including changes in those inputs, judgments and assumptions and the effect of those changes on the measurement.
The effective date for the proposed ASU will be determined after the FASB considers stakeholder feedback. The proposed ASU is available for comment until December 15, 2016.