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Measurement period for accounting for impacts of tax reform ending Dec. 22, 2018

The Tax Cuts and Jobs Act (TCJA) signed into law on Dec. 22, 2017, the most sweeping overhaul of the Internal Revenue Code in more than thirty years, has had a significant impact on insurance organizations. Changing from a worldwide to a territorial tax system, several insurance specific provisions and countless other changes to the calculation of taxable income, the TCJA left insurance organizations scrambling to understand, analyze and incorporate the many new provisions of the tax bill.

Accounting guidance released by SEC, FASB and NAIC

To address concerns raised by companies regarding the enactment date of the TCJA and the limited timeframe available to accurately determine the impact of tax changes within their annual and quarterly reports filed with the Securities and Exchange Commission (SEC), the staff from the Office of the Chief Accountant and Corp Fin released Staff Accounting Bulletin (SAB) 118 on Dec. 22, 2017, to provide guidance on accounting and disclosures for the impact of the TCJA. The Financial Accounting Standards Board (FASB) released a Q&A in early 2018 confirming SAB 118 may be used for private companies and not-for-profit entities and the National Association of Insurance Commissioners (NAIC) quickly followed suit with the adoption of interpretation (INT) 18-01. As part of the guidance issued by the SEC, FASB and NAIC, companies were given a one-year measurement period to finalize the accounting for the impacts of the TCJA. The one-year measurement period ends on Dec. 22, 2018. Insurance organizations must fully account for all aspects of tax reform within their financial statements by this date.

Key provisions affecting insurance organizations

In addition to lowering the corporate tax rate from 35 percent to 21 percent, the TCJA incorporated several insurance specific provisions with effective dates as of Jan. 1, 2018, including the following:

  • Loss reserve discounting – Nonlife reserves must now use Internal Revenue Service (IRS) discount factors based on a corporate bond yield curve rather than the applicable federal mid-term rate, and historical loss payment patterns are no longer allowed; Life reserves are based on the greater of net surrender value or 92.81 percent of the NAIC reserve for nonvariable contracts, and the greater of net surrender value or separate account reserve plus 92.81 percent of the excess of the total NAIC reserve over the greater of net surrender value or separate account reserve for variable contracts.
  • Proration – The bill replaces the 15 percent proration reduction with a reduction equal to 5.25 percent divided by the top corporate tax rate; with a top corporate tax rate of 21 percent for 2018 and thereafter, the percentage reduction is now 25 percent.
  • Life insurance proration – The bill modifies the life insurance company proration rule for reducing dividends received deductions and reserve deductions; for purposes of the life insurance proration rule, 70 percent is the company’s share and 30 percent is the policyholders’ share.
  • Change in method for computing reserves – The 10-year recognition period is repealed and the income or loss resulting from the change in method is recognized in the same manner as other accounting method changes (recognized in one year if resulting in a loss and recognized ratably over four years if resulting in income).
  • Capitalization of certain policy acquisition expenses – The 120-month amortization period is changed to 180 months and the capitalization percentages are increased by approximately 20 percent to the following: annuity contracts – 2.09 percent, group life contracts – 2.45 percent and all other specified – 9.20 percent.
  • Repeal of small life insurance company deduction – The TCJA eliminates the small life insurance company deduction, which was 60 percent of the first $3 million of life insurance-related income subject to certain phase-outs and limitations.
  • Pre-1984 surplus accounts – The bill repeals the deferment of tax on the “policyholder surplus account” and any income that is still tax-deferred as of Dec. 31, 2017, will be picked up ratably over eight years beginning in 2018; life company losses are not allowed to offset the policyholders surplus account balance subject to tax.
  • Special estimated tax payments – The bill repeals special estimated tax payments under section 847 that allowed an additional deduction not to exceed the excess of the amount of undiscounted unpaid losses over the amount of the related discounted unpaid losses; a special loss discount account had to be established and maintained and special estimated tax payments had to be made.

Tax reform reporting disclosures for year-end

As insurance organizations complete the accounting for all aspects of tax reform by the end of the measurement period, certain tax reform related footnotes must also be considered. The guidance under SAB 118, relied upon by both the FASB and NAIC, requires certain disclosures including when the accounting for the income tax effects of the TCJA has been completed. Additionally, the NAIC adopted INT 18-03 at the 2018 summer meeting, which includes additional disclosure requirements for insurance organizations that have an alternative minimum tax credit carryforward that is getting utilized or refunded, a tax liability for the section 965, or repatriation, tax or are electing to set up a deferred inventory item for basis differences expected to reverse as global intangible low-taxed income.

For sample footnote disclosures related to tax reform for use in insurance organizations’ year-end 2018 financial statements, please click here >

For more information on this topic, or to learn how Baker Tilly's insurance tax advisors can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

Carrie S. Small
Partner, CPA, MST

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