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Discussions to Resume About Proposed Changes to Insurance Accounting

The FASB is ready to resume the discussion on its project to improve the accounting for long-term insurance policies such as life insurance. The board also plans to debate whether certain contracts common in the utilities industry should be part of the lease accounting standard.

The FASB at its August 2, 2017, meeting plans to consider how it may proceed with its much-watched proposal to make accounting for life insurance and other long-term insurance products more transparent.

The board plans to debate the accounting for the liabilities associated with future payouts to policyholders for traditional and limited payment insurance contracts, according to a preliminary agenda. The accounting for future payouts is one of the provisions outlined in Proposed Accounting Standards Update (ASU) No. 2016-330, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which the FASB released in September 2016. The overall proposal calls for revamping how insurance companies that offer long-term policies such as life insurance measure and report their liabilities. The area has long has been likened by investors and analysts to looking at a “black box.” Insurer liabilities — the payments they expect to make to their customers — are a significant piece of understanding the financial health of insurance companies.

The FASB has had an unusually long lag time between the release of the proposal and the start of deliberations on it in part because of changeovers in the accounting board’s membership. FASB Chairman Russell Golden in April said he wanted to wait until Marsha Hunt, the former vice president and corporate controller of diesel engine manufacturer Cummins Inc. in Columbus, Indiana, joined the FASB in July. Hunt replaced 10-year FASB member Lawrence Smith, who retired on June 30.

The FASB had billed the insurance accounting proposal as a set of targeted improvements versus a wholesale change to accounting for insurance companies, but many insurers have told the board that the proposal goes much farther than a set of simple changes. One insurance company executive in April told the FASB that the proposal would require “armies of actuaries” to implement.

Also on August 2 the FASB plans to discuss ASU No. 2016-02, Leases, which was published in February 2016 to require businesses to report on their balance sheets their leased office space, storefronts, vehicles, and equipment as assets. The rent they owe for the assets is reported as a liability. The accounting change is meant to do away with the decades-old practice of keeping leases off balance sheets, which critics said made businesses appear less indebted than they actually are.

The standard goes into effect for public companies in 2019. As they prepare for the standard’s effective date, some utility companies have asked the FASB whether certain arrangements qualify as leases. The FASB in May debated whether secondary pipelines — often called laterals — in natural gas pipeline distribution systems fall within the scope of the leasing standard. The board also discussed whether land easement rights could qualify.

The board at the time agreed that it needed to do more research. The upcoming discussion is expected to resume the debate.

Finally, on August 2, the FASB plans to discuss the third phase of its effort to clarify the definition of a business and focus on ways to improve the accounting for asset acquisitions and business combinations. The FASB in 2013 agreed to study whether the differences in the acquisition and derecognition guidance for assets and businesses could be aligned as part of its broader project to improve the business combinations guidance in U.S. GAAP.

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