The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU), No. 2022-05, Financial Services – Insurance (Topic 944): Transition for Sold Contracts (ASU 2022-05). This new ASU amends the transition guidance in ASU No. 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) for 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:
- For public business entities that meet the definition of a SEC filer and are not smaller reporting companies, LDTI is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early application, permitted.
- For all other entities, LDTI is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025, with early application permitted.
The amendments in LDTI require an insurance entity to apply a retrospective transition method at the beginning of the earliest period presented or the beginning of the prior fiscal year if early application is elected. However, the FASB received feedback that contracts that were derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date would likely not provide decision-useful information to investors and other allocators of capital, and may result in significant operability challenges for insurance entities to apply the guidance. Accordingly, ASU 2022-05 has been issued to allow an insurance entity to make an accounting policy election, on a transaction-by-transaction basis, to exclude certain contracts or legal entities from applying the guidance in ASU 2018-12 when, at the LDTI effective date:
a) The insurance contracts have been derecognized because of a sale or disposal, and
b) The insurance entity has no significant continuing involvement with the derecognized contracts.
If the insurance entity elects to apply such an accounting policy, the insurance entity should disclose in the notes to financial statements a qualitative description of each sale or disposal transaction to which it applied the accounting policy election.