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FASB

FASB Votes to Finalize Proposed Year Delay on Life Insurance and Annuities Accounting Rules

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

By Denise Lugo

The FASB on September 30, 2020, voted 6 to 1 to finalize a July proposal to delay long-term insurance accounting rules for a second time, citing the need to give insurers adequate time to properly implement the changes amid the coronavirus pandemic.

The rules were drawn to simplify targeted areas in reporting life insurance, disability income, long-term care, and annuity payouts.

Board members said though insurers likely could have adopted the rules in time, the information that would have resulted from that would not have been high quality because companies would have had to take short cuts.

“It became very clear that the short cuts would have resulted in lower quality information and the short cuts would have become permanent, they would not have gone back and incurred additional costs to take out the short cuts and put in something more permanent,” FASB member Harold Schroeder said. “…I think waiting one year longer to get something better in the longer term is worth the wait,” said Schroeder, one of two investor voices on the board.

The deferral means Accounting Standards Update (ASU) No. 2018-12Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, will be deferred from 2022 to 2023 for large public companies; from 2024 to 2025 for smaller reporting companies (SRCs); and from 2024 to 2025 for private companies and not-for-profit organizations.

The board also voted to modify its previous decision to amend the early application provisions in ASU No. 2018-12 whereby the early application transition date would be either the beginning of the prior period or the earliest period presented (as opposed to only the beginning of the prior period).

The decisions would finalize Proposed ASU No. 2020-400Financial Services—Insurance (Topic 944): Effective Date and Early Application.

Botosan: Delay Leaves Investors Worse Off

FASB member Christine Botosan, the board academic, reaffirmed her dissent on the deferral stating that investors will be left worse off from having to wait a longer period to get more transparent information.

The standard was issued to substantially improve the timeliness and transparency of information, Botosan said, and the board did not receive convincing evidence that the challenges resulted in significant delays and the need for another deferral in the standard.

“And I believe that making investors wait for that better information until 2023 for large insurers and 2025 for all of the other insurers in the long-duration insurance space is going to cause harm particularly when investors are struggling to assess the long-term impacts of the pandemic and a prolonged period of low interest rates on insurers financial health,” she said.

Botosan said companies during second quarter earnings calls indicated that they were on track to adopt the rules, were able to work effectively remotely, and remained on track with major cost savings programs. “A recent poll indicated that 84 percent of insurers experienced a slight delay in implementation due to COVID and some said a longer implementation would drag the process out,” she said.

Ultimately, the costs the delay would impose on investors far outweigh the benefits to preparers, said Botosan. “And if insurers come back a third time to request even more time, I hope that when we go through that process we will insure that investors have a voice in our decision and that we proactively gather feedback from the investors community,” she said.

Insurance Sector Requested Delay

The new rules were developed after 12 years of work to simplify specific areas in insurance contracts rules, a highly complex area in GAAP because of nuances within the sector. In November 2019, the board deferred the effective date after companies said it was proving tougher than they expected to implement and they needed more time to rework old systems, educate investors, among other issues.

The recent ask for a delay came in response to the COVID-19 pandemic.

The insurance sector said COVID-19 as well as the recent market volatility has caused them to have to divert resources to perform additional projections and financial analysis to try to figure out how these complex events will impact companies. The sector has also had to address increased inquiries from regulators.

In finalizing the proposed delays, FASB members said they were sympathetic with any company that had to navigate implementing a big standard amid COVID 19.

“I think we need to have sympathy that COVID-19 had on their timetable, particularly earlier this year, and I am encouraged that the delay will provide them additional cushion if you well for testing and parallel runs,” FASB member Susan Cosper said. “As we think about this this wasn’t an industry that actually waited to do their implementation, from the very get go they started their implementation plans, and certainly we had a lot of outreach meetings with companies to understand at a very granular level their project plan.”

 

This article originally appeared in the October 1, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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