The FASB plans to publish in August 2018 an update to U.S. GAAP to make accounting for life insurers and other long-term insurance companies more transparent and easier to understand. Ahead of the expected publication, a life insurance industry trade group is telling the FASB that insurers lack the resources to implement the changes by the expected effective date of 2021.
U.S. insurance companies will not be ready to implement the FASB’s insurance standard by its expected effective date of 2021, an industry trade group told the accounting board.
The American Council of Life Insurers (ACLI) asked the FASB on June 20, 2018, to extend the effective date of the forthcoming standard for at least one more year. A FASB spokesperson said the board was reviewing the request.
“Every single person out there that has actual work experience knows it’s impossible to do,” said Michael Monahan, ACLI senior director of accounting policy, of the 2021 effective date for public insurance companies.
The FASB in June agreed to publish the final version of its long-running effort to improve the notoriously opaque area of accounting. The final amendments are slated for August release and are expected to overhaul how life insurers and other companies offering long-term policies calculate their liabilities — the payments they owe to customers. Insurers are preparing for accounting changes that will require them to overhaul how they update the key assumptions they use when estimating liabilities.
The board agreed that the standard will go into effect for public companies for fiscal years and interim periods within those years beginning after December 15, 2020, which will mean 2021 for most calendar-year businesses. Private companies will not have to follow the new guidance until their fiscal years that begin after December 15, 2021, and for interim periods beginning after December 15, 2022. The FASB said it will permit adoption of the amended guidance ahead of the effective date.
The FASB plans to base the final amendments on Proposed Accounting Standards Update (ASU) No. 2016-330, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which was issued for public comment in September 2016.
The 2021 effective date for public companies is more than two years away, but because of the requirement to provide comparable results when the new accounting requirements are adopted, most companies will have to start implementing the new guidance the year before the deadline. In addition, to comply with the internal control requirements of the Sarbanes-Oxley Act of 2002 , companies will have to test their systems at least a quarter before the new accounting goes live and then fix whatever problems they find in the testing phase, Monahan said.
“It’s virtually impossible,” he said.
In addition to the ACLI request, Principal Financial Group Inc. submitted a letter to the FASB on June 22 that also asked for at least an extra year.
The forthcoming standard “represents a complete overhaul of the financial reporting framework for traditional insurance contracts, market risk benefits, and deferred acquisition costs,” Principal wrote. The insurance standard uses the term “deferred acquisition costs” for the sales and marketing expenses underwriters incur when soliciting new business and then write off over several years to avoid a reduction in reported earnings.
Multiline insurers like Principal sell a range of policies, such as life, disability, and dental, and Principal tracks its various product lines with customized software.
“These systems generally use older technology (since they were initially set up many years ago based on the current guidance, where the underlying models and inputs were not updated after inception) and include both vendor and home-grown applications. The changes to the liability for traditional insurance contracts will require the most significant systems changes,” Principal wrote.
The FASB’s work on the insurance standard was an effort to address long-standing criticisms that the financial statements of insurance companies are impenetrable to all but the most specialized analysts and investors.
The main criticism centers on the relevance of insurance company financial information when U.S. GAAP requires insurers to measure their liabilities using assumptions on investment returns, expenses, mortality, and policy cancellations and missed payments that are established when a policy is sold. For long-term life insurance policies, this means assumptions could be years or even decades out of date.
It is expected that the final amendments will require insurers to regularly update their assumptions. The FASB believes the upcoming guidance will simplify how insurers amortize the costs to acquire new policyholders and change how to measure insurance policies with investment features that protect customers from losses.