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Proposal issued to delay accounting rules for life insurance and annuities contracts

Prudential Financial, Liberty Mutual, Principal Financial Group, Aflac Inc., among a number of the nation’s life insurance companies that pushed over the past year for more time to adopt new guidance for reporting long-term insurance contracts, will see that goal come to fruition.

The Financial Accounting Standards Board (FASB) on Aug. 21, 2019, proposed a split set of deferrals on the effective date of new rules for reporting long-term insurance contracts, guidance that provides targeted simplifications for reporting life insurance, disability income insurance, long-term-care insurance and annuities.

The proposal is the second in the past week the FASB issued to defer new guidance, part of a shift in its philosophy for setting effective dates for major new accounting changes.

The deferrals follow months of petitions for an effective date delay from insurance companies, many of which have consolidated in effort to expand beyond their traditional roles.

Under the changes, larger public companies would get a one-year deferral, from 2021 to 2022, for the adoption Accounting Standards Update (ASU) No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts.

The rules would also be deferred from 2021 to 2024 for smaller reporting companies (SRCs) as defined by the SEC and from 2022 to 2024 for private companies and not-for-profits.

“Based on what we observed while monitoring implementation of the long-duration insurance standard—and consistent with our new philosophy to stagger effective dates between large publicly traded companies and all other companies and organizations—the FASB has proposed to grant all insurance companies at least one additional year to apply the standard,” FASB Chairman Russell Golden said in a statement. “We believe it will result in a higher quality implementation for all.”

The board said it is seeking comments by Sept. 20 on changes, issued as Proposed ASU No. 2019-760, Financial Services—Insurance (Topic 944): Effective Date.

Insurance practitioners said the delay will enable insurers to analyze how to best manage their businesses under the accounting changes and thereby provide investors with better information about emerging profits.

Companies view the adoption process for the new rules as a transformational initiative to create long-term, strategic business improvements, according to the “basis for conclusions” section of the proposed deferral. Those that have started to modernize their reporting and actuarial systems said a delay would help them to better align modernization efforts with implementation timelines. In addition, companies would have more time to perform parallel runs and test controls and educate their stakeholders.

ASU No. 2018-12 provides investors with a more current view of an insurers expected future cash flows, as opposed to a historical view that includes a provision for risk of adverse deviation. It simplifies and improves the accounting for certain market-based options or guarantees associated with deposit or account balance contracts. It provides a simpler method to amortize deferred acquisition cost (DAC) and requires more effective footnote disclosures.

Practitioners, however, have said some of the implementation challenges companies will run into stem from portions of the rules that are not as clearly flushed out as they could be. For example: the guidance for reserves held prior to when a claim takes place was changed affecting the discount rates and how the calculations takes place. While the rules for claim reserves were not changed, the pre-claims reserve now must take into account the amount of claim reserve set up. Practitioners said that because the assumptions could be quite different, companies need time to work through how these two reserves will interact under the new guidance.

The guidance was issued by FASB after more than a decade of work. Moreover, the board conducted extensive outreach about deficiencies in existing Generally Accepted Accounting Principles (GAAP) for long-term insurance contracts and to figure out how to address them. The outreach included hundreds of meetings with preparers, auditors, financial statement users, trade organizations and other groups. The board held 13 public roundtables, among other discussions. Ultimately, the FASB determined that the benefits of the guidance outweighed the costs and issued the standard in 2018.

For more information on this topic, or to learn how Baker Tilly accounting and assurance specialists can help, contact our team.

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