FASB Proposes Changes to Transition Requirements in Long-duration Insurance Guidance
The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU) that would amend transition guidance in ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), for contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date.
ASU No. 2018-12 was released in August 2018 to improve, simplify and enhance the financial reporting requirements for long-duration contracts issued by insurance entities. It requires an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early application is elected.
FASB said some stakeholders noted that applying the LDTI guidance to contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date likely would not provide decision-useful information to investors and may result in significant operability challenges for insurance entities to apply the guidance. Without an amendment to the transition guidance, an insurance entity would be required to reclassify a portion of the previously recognized gains or losses to the LDTI transition adjustment because of the adoption of a new accounting standard.
To address these issues, the proposed ASU would amend the LDTI transition guidance to allow an insurance entity to make an accounting policy election to exclude certain contracts or legal entities from applying the LDTI guidance when they have been derecognized because (a) of a sale or disposal before the LDTI effective date and (b) the insurance entity has no continuing involvement with the derecognized contracts.
FASB encourages stakeholders to review and provide comments on the proposed ASU by Aug. 8, 2022.