The Financial Accounting Standards Board has proposed a big change in accounting for insurance companies that deal in long-duration contracts like life insurance, annuities, disability, and long-term care.
If issued as proposed, the accounting standards update would require significant implementation efforts by entities that are affected, says PwC in an alert to clients. “Although characterized by FASB as ‘targeted’ improvements, the proposals revise key elements of the measurement models for certain long-duration liabilities, as well as the amortization model for deferred acquisition costs for long-duration contracts,” PwC says.
FASB Chairman Russ Golden says the changes result from outreach with those who have a stake in insurance company accounting, where the board heard appeals for improvement in some specific areas of financial reporting related to long-duration contracts. “Based on that feedback, the board developed the proposed ASU, which sets forth recommended, targeted improvements to enhance the quality of information provided to investors about these contracts,” he said in a statement.
The odyssey to new insurance accounting began in 2007 with a discussion paper that addressed the potential for comprehensive improvements in the accounting for insurance broadly, not just for insurance companies, as well as the potential to converge U.S. GAAP with International Financial Reporting Standards. That led to a 2013 proposal on the accounting for insurance contracts under U.S. GAAP, which the board chose to refine further to focus on two separate accounting projects, one for short-duration contracts and the current proposal for long-duration contracts.
FASB says the exposure draft, which is open for public comment through Dec. 15, calls for more timely recognition of changes in the liability for future policy benefits by requiring entities to use updated assumptions to measure the liability. It would eliminate the usage of an asset rate, or the insurance company’s expected investment yield, to discount liability cash flows, focusing instead on cash flows discounted at the high-quality fixed-income instrument yield.
The proposal also would simplify and improve the accounting for certain options or guarantees in variable products by requiring them to be measured at fair value, FASB says, and would simplify the amortization of deferred acquisition costs and improve disclosures.
PwC says the proposal would require insurance companies to collect data they do not ordinarily process to achieve the changes FASB envisions. The significant changes, in PwC’s assessment of the proposal, will arise in the updating of assumptions, the calculation of the liability discount rate, the new uses of fair value measurement, changes to the universal life model, and additional disclosures. The simplified amortization of deferred acquisition costs also would represent a significant change, the firm says.
FASB says it did not arrive at the proposal without significant consultation with stakeholders, including four roundtable sessions, more than 100 meetings with users and preparers alike, and more than 200 comment letters on a 2013 proposal. The board says it has 18 preparers standing ready to field test the new standard as well.
The board has not established a targeted effective date for the new standard. More public roundtable meetings will be scheduled in the first quarter of 2017, FASB says.