The FASB on Dec. 15, 2022, published a tweak to its long-term insurance accounting standard to make it easier for insurers that have derecognized businesses and contracts they no longer own to implement the rules.
The board issued Accounting Standards Update (ASU) No. 2022-05, Financial Services–Insurance (Topic 944): Transition for Sold Contracts, to revise the way companies that have already sold or disposed of certain contracts or businesses would approach the adoption of ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), a major accounting standard that addresses life insurance and annuities contracts.
The amendment was developed after two large insurance companies—Allstate Insurance Co. and Assurant, Inc.— requested a simplification to the implementation guidance in the standard, citing operational burdens unnecessarily posed on companies. (See Big Insurers Ask FASB to Amend Long-term Contracts Accounting Rules to Exclude Disposed Contracts in the June 2, 2022, edition of Accounting & Compliance Alert.)
The full board approved the change.
The guidance is a narrow amendment to the transition requirements of ASU No. 2018-12, providing companies with an accounting policy election “to exclude certain contracts or legal entities from applying the transition guidance” when they have been derecognized because of a sale or disposal before the standard takes effect.
Overall, the rule applies when the insurer has no continuing involvement with the derecognized contracts or businesses as they will not generate cash in the future.
Without the accounting policy election, accountants would have had to explain to investors the effect of adopting ASU No. 2018-12 on contracts they no long own or make money from, which would not provide useful information, the “Basis for Conclusions” section of the ASU explains.
Furthermore, without the change, companies would have been faced with a huge application burden and costs because personnel with technical expertise, systems, and historical records are often transferred to the buyer upon the close of a sale or disposal transaction.
The amendment was issued as an option as opposed to mandatory guidance so that companies that have already completed or are close to completing their implementation efforts to adopt the broader standard would not incur significant costs, the rule text states. Otherwise, those entities would have had to reverse the implementation work already completed, which would be time consuming and costly.
Since its issuance in 2018, the effective date of ASU No. 2018-12 was deferred twice — in 2019 and subsequently in 2020.
Both the amendment and ASU No. 2018-12 now take effect – for large public companies – for fiscal years beginning after Dec. 15, 2022, and interim periods within those fiscal years. For small public companies, private companies, not-for-profits and other entities, the guidance is effective for fiscal years beginning after Dec. 15, 2024, and interim periods within fiscal years beginning after Dec. 15, 2025.
Early application is permitted for all entities.
This article originally appeared in the December 16, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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