United States

Accounting guidance for long-duration insurance contracts


The Financial Accounting Standards Board recently issued Accounting Standards Update (ASU) 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts. The 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:

  • Requiring updated assumptions for liability measurement. The ASU requires an insurance entity to (a) review and, if there is a change, update the assumptions used to measure cash flows at least annually with the effect recorded in net income, and (b) update the discount rate assumption at each reporting date with the effect of rate changes recorded in other comprehensive income.
  • Standardizing the liability discount rate. The ASU requires an insurance entity to discount expected future cash flows at an upper-medium grade (low-credit-risk) fixed-income instrument yield that maximizes the use of observable market inputs.
  • Simplifying and improving the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts by requiring those benefits to be measured at fair value instead of using two different measurement models.
  • Simplifying the amortization of deferred acquisition costs. Deferred acquisition costs previously amortized in proportion to premiums, gross profits or gross margins instead will be amortized on a constant level basis over the expected term of the related contracts.
  • Increasing transparency by improving the effectiveness of disclosures. The ASU requires 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 ASU also requires an insurance entity to disclose 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.

For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption is permitted.