The Financial Accounting Standards Board has issued a new accounting standard that revises the reporting around long-duration contracts for insurance companies.

The FASB approved Accounting Standards Update No. 2018-12 to improve the financial reporting by insurance companies for contracts such as life insurance, disability income, long-term care, and annuities. Now contained in the Accounting Standards Codification under Topic 944, the standard requires entities to use assumptions at least annually when measuring their liabilities, with the effects recorded in net income.

The new standard gives financial statement users more timely and transparent information about long-term contracts, said FASB Chairman Russ Golden in a statement. The board has been picking away at the project for more than 10 years, documenting hundreds of meetings and comment letters, including various encounters with preparers and other stakeholders.

In addition to requiring updated assumptions, the new accounting pronouncement standardizes the liability discount rate to a market-observable rate reflecting low credit risk. The effects of rate changes will flow to comprehensive income, which is a component of equity on the balance sheet.

The standard also requires entities to follow a single, fair-value model for measuring market risk benefits. That is intended to produce greater uniformity across similar market-based benefits and to better align reporting with how derivatives used to hedge capital market risk are already measured. Finally, the standard replaces earnings-based amortization methods with a less volatile approach, and it requires new disclosures, especially about significant assumptions and the effect of changes in assumptions.

When FASB began working on its new insurance standard, convergence with International Financial Reporting Standards was often a stated objective behind any accounting change. While the convergence movement has lost steam, the FASB and IASB both elected to adopt standards for insurers that result in more current reporting of insurer obligations.

The International Accounting Standards Board issued IFRS 17 Insurance Contracts in 2017 to update international rules on insurance contract reporting. A notable difference between the new U.S. and international rules, says a FASB spokesman, is the scope of the two standards. The IFRS standard applies to both short- and long-duration contracts while the U.S. GAAP standard is specific to long-duration contracts.

The U.S. standard takes effect for calendar-year public companies on Jan. 1, 2021. As is customary, the FASB has given other entities an additional year to comply.