November 10, 2020
One More Year to Prepare for Long-Duration Contracts ASU
The FASB voted to delay the implementation of ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), by one year. For SEC filers, LDTI is effective for fiscal years beginning after December 15, 2022 and for all other entities for fiscal years beginning after December 15, 2024. Additionally, the FASB updated the early application transition date to the beginning of the prior period or the earliest period presented.
The new long-duration contracts standard applies to insurance companies that issue life insurance, disability income, long-term care policies and annuities. The standard includes new reporting requirements and disclosures expected to enhance reporting by creating a more current measure of the liability. The liability for future policy benefits will be updated regularly for actual experience and future assumptions, and discounted using a fixed-income instrument yield that reflects the characteristics of the liability. Additionally, market risk benefits will be measured at fair value creating a more uniform approach for all long-duration contracts. ASU 2018-12 simplifies the amortization of deferred acquisition costs to be recognized over the life of the contract as opposed to existing practice of amortization in line with expected gross profits.
The additional disclosure requirements include annual rollforwards of the reserve liability and detail related to significant inputs, judgments, assumptions and methods used. The impact of ASU 2018-12 touches more than just the financial reporting function as these changes impact financial, actuarial and policy maintenance systems. Insurance companies should use the additional time provided by this delay to prepare for the implementation and address the risks across the company to ensure a smooth transition. The FASB expects the new standard will create efficiencies in the actuarial process and enhanced reporting to allow insurance companies to make more accurate strategic decisions.
FinREC and the AICPA Insurance Expert Panel continue to develop working drafts on accounting implementation issues that have been identified for the new standard.
We are committed to keeping you up-to-date. Please check our website for subsequent developments.
If you have any questions about this, contact the Johnson Lambert team.