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FASB Refines Guidance for Long-Duration Insurance Contracts

Sep 30th 2016
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A proposal issued by the Financial Accounting Standards Board (FASB) on Sept. 29 is geared toward improving insurance accounting for long-duration contracts, such as life insurance, disability income, long-term care, and annuities.

The amendments in the proposed Accounting Standards Update (ASU), Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, would provide financial statement users with more useful information about the amount, timing, and uncertainty of cash flows related to those contracts, according to the FASB.

“During outreach on our project to consider potential improvements to the insurance accounting model, stakeholders identified specific areas of financial reporting related to long-duration contracts that could be improved,” FASB Chairman Russell Golden said in a written statement. “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.”

The changes proposed by the FASB include:

  • Improving the timeliness of recognizing changes in the liability for future policy benefits by requiring that updated assumptions be used to measure the liability.
  • Eliminating the use of an asset rate to discount liability cash flows and instead requiring that cash flows be discounted at a high-quality fixed-income instrument yield.
  • Simplifying and improving the accounting for certain options or guarantees in variable products, such as guaranteed minimum death, accumulation, income, and withdrawal benefits, by requiring those benefits to be measured at fair value instead of using two different measurement models.
  • Simplifying the amortization of deferred acquisition costs.
  • Improving the effectiveness of disclosures. Also, new disclosures would be required, including liability rollforwards and qualitative and quantitative information about significant inputs, judgments, and assumptions used in measurement.

These proposed changes, however, would not apply to policyholders and noninsurance entities, the FASB said.

Comments on the proposed ASU are due by Dec. 15 and can be submitted via the FASB’s website. The exposure draft contains instructions on other ways to submit comments.