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On the Horizon: FASB made changes to guidance on long-term insurance contracts

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Contents FASB

Changes made to guidance on long-duration insurance contracts
Board proposes amendments to credit losses guidance
Summary of June 11 meeting of TRG for credit losses posted
Taxonomy improvements proposed related to lessor accounting proposal

SEC amends and simplifies certain disclosure requirements International Federation of Accountants

Guidance released on financial instruments
IPSASB updates staff questions and answers on sovereign debt restructurings

Comment letter issued

FASB Changes made to guidance on long-duration insurance contracts The Board issued ASU 2018-12, Financial Services – Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which changes how insurance companies account for and disclose long-duration contracts, such as life insurance, disability income, long-term care, and annuities, and how they amortize deferred acquisition costs. These amendments do not provide guidance on how policyholders or noninsurance entities should account for these contracts.

Changes resulting from the ASU are summarized below.

Assumptions used to measure the liability for future policy benefits for certain contracts

The amendments require an insurance entity to review the assumptions used to measure the liability for future policy benefits and, if there is a change, to update the assumptions used to measure cash flows at least annually and the assumptions used to determine the discount rate at each reporting date.

The change in the liability estimate that results from updating cash-flow assumptions should be recognized in net income, while the change in the liability estimate that results from updating the discount-rate assumption should be recognized in other comprehensive income. 

The amendments also require an insurance entity to use an upper-medium-grade (low-credit-risk) fixed-income instrument yield that maximizes the use of observable market inputs when it discounts expected future cash flows.

Measurement of market-risk benefits

The new guidance requires an insurance entity to (1) measure all market-risk benefits associated with deposit (or account-balance) contracts at fair value, and (2) recognize the portion of any change in fair value attributable to a change in the instrument-specific credit risk in other comprehensive income. 

ASU 2018-12 also adds the following definition of “market risk benefit” to the Codification’s Master Glossary: “A contract or a contract feature in a long-duration contract issued by an insurance company that both protects the contract holder from other-than-normal capital market risk and exposes the insurance entity to other-than-normal capital market risk.”

Deferred acquisition costs 

The amendments simplify the amortization of deferred acquisition costs and other balances by requiring entities to amortize those balances on a constant level over the expected term of the related contract. Entities are also required to write off deferred acquisition costs for unexpected contract terminations, but these costs are not subject to impairment testing.

Disclosures

ASU 2018-12 requires new disclosures, including disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits and for policyholder account balances, market-risk benefits, separate account liabilities, and deferred acquisition costs. The new disclosures also include qualitative and quantitative information about how the assets and liabilities were measured, such as significant inputs, judgments, and assumptions used in their measurement, including any changes in those inputs, judgments, and assumptions along with their effect on the measurement.

Transition requirements and effective date

An insurance entity should apply the amendments in the ASU related to the liability for future policyholder benefits for certain contracts, and the amendments related to deferred acquisition costs, to contracts in force as of the beginning of the earliest period presented, based on their existing carrying amounts on the transition date, adjusted for the removal of any related amounts in accumulated other comprehensive income. Insurance entities also have the option to apply the amendments retrospectively, with a cumulative-effect adjustment to the opening balance of retained earnings, using information based on actual historical experience as of contract inception instead of using the contract’s existing carrying amounts. Insurance entities are required to apply the same transition method to the liability for future policyholder benefits and to deferred acquisition costs. 

Market-risk benefits should be measured at fair value at the beginning of the earliest period presented, with the cumulative effect of changes in the instrument-specific credit risk between the contract inception date and the transition date recognized in the opening balance of accumulated other comprehensive income. The difference between the carrying value and fair value at the transition date, excluding the effect of changes in the instrument-specific credit risk, should be recorded as an adjustment to the opening balance of retained earnings as of the beginning of the earliest period presented.

The amendments are effective for public business entities in fiscal years, and in interim periods within those fiscal years, beginning after December 15, 2020. All other entities should apply the amendments in fiscal years beginning after December 15, 2021 and in interim periods in fiscal years beginning after December 15, 2022. Early adoption is permitted for all entities.

The FASB staff also issued proposed taxonomy improvements related to the ASU. Comments on these proposed taxonomy improvements are due October 16. 

Board proposes amendments to credit losses guidanceThe Board issued the proposed ASU, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, which includes proposed amendments to the guidance in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The proposed amendments would 
  • Provide separate and staggered effective date requirements for public business entities filing with the SEC, public business entities not filing with the SEC, and all other entities, by requiring that all other entities adopt the proposed amendments in fiscal years beginning after December 15, 2021 and in interim periods within those fiscal years. As originally issued, ASU 2016-13 requires all other entities to adopt this new guidance in fiscal years beginning after December 15, 2020 and in interim periods within fiscal years beginning after December 15, 2021.
  • Exclude operating lease receivables from the scope of the guidance related to credit losses on financial instruments measured at cost in ASC 326-20. Impairment of receivables resulting from operating leases would be accounted for under the guidance in ASC 842, Leases.

The effective date and transition requirements for the proposed amendments would be the same as those in ASU 2016-13. 

Comments on the proposal are due September 19. 

Summary of June 11 meeting of TRG for credit losses posted The Board met with the Transition Resource Group for Credit Losses (TRG) on June 11 to discuss implementation issues related to the FASB’s standard on credit losses, ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The Board has posted a summary of the issues discussed by the TRG.

See NDS 2018-08 for a summary of the implementation issues discussed by the TRG at the June 11 meeting. 

Taxonomy improvements proposed related to lessor accounting proposal The FASB staff issued proposed taxonomy improvements related to the proposed ASU, Leases (Topic 842): Narrow-Scope Improvements for Lessors. Comments on the proposed taxonomy improvements are due September 12. 

See the August 16 On the Horizon for a summary of the proposed ASU.



SEC amends and simplifies certain disclosure requirements On August 17, pursuant to its Disclosure Effectiveness Initiative and to implement provisions of the FAST Act, the SEC adopted the Final Rule, Disclosure Update and Simplification. The amendments affect many aspects of the SEC’s disclosure regime, including Regulations S-K and S-X, the Securities Act, the Exchange Act, and many SEC forms, and are intended to simplify issuer compliance efforts while providing investors with substantially the same information.

Among other things, the Final Rule eliminates certain disclosure requirements that are
  • Redundant, duplicative, or overlapping with U.S. GAAP, IFRS Standards, or other Commission disclosure requirements
  • Outdated due to the passage of time or changes in the regulatory, business, or technological environments
  • Superseded by existing Commission disclosure requirements, recent legislation, or updated U.S. GAAP requirements

The SEC is also referring certain disclosure requirements that overlap with U.S. GAAP to the FASB for potential incorporation into U.S. GAAP.

The Final Rule is mainly applicable to domestic issuers and foreign private issuers; however, some amendments apply to other entities. Those entities may include significant acquirees and significant equity method investments for which financial statements are required under Regulation S-X, Rules 3-05 and 3-09, respectively, as well as Regulation A issuers, investment advisers, investment companies, broker-dealers, and nationally recognized statistical rating organizations.

A more detailed discussion of the Final Rule will be included in a forthcoming New Developments Summary.

The Final Rule is effective 30 days after publication in the Federal Register.



International Federation of AccountantsGuidance released on financial instruments The International Public Sector Accounting Standards Board (IPSASB) of the International Federation of Accountants (IFAC) released IPSAS 41, Financial Instruments, which includes new classification and measurement requirements for financial assets, a forward-looking impairment model, and a flexible principle-based hedge accounting model. 

IPSAS 41, which is based on IFRS 9, Financial Instruments, as modified for the public sector, replaces the existing guidance related to the classification, recognition, and measurement of financial instruments in IPSAS 29, Financial Instruments: Recognition and Measurement.

The effective date of IPSAS 41 is January 1, 2022. Earlier application is encouraged. Public sector entities should apply the new guidance retrospectively, unless specific conditions are met. 

IPSASB updates staff questions and answers on sovereign debt restructuringsIPSASB also issued a document featuring updated questions and answers developed by the staff titled “Accounting for Sovereign Debt Restructuring under IPSAS.” 

The updated publication addresses questions about how IPSAS reflect the accounting consequences of sovereign debt restructuring transactions, such as transactions resulting in the extension of maturities, reductions in interest rates, changes in counterparties, and the issuance of additional complex financial instruments. 

The publication is neither an authoritative pronouncement nor an interpretation of authoritative pronouncements issued by the IPSASB. It does not amend or override the requirements of existing IPSAS or provide further implementation guidance.



Comment letter issued On August 10, Grant Thornton LLP submitted a comment letter to the FASB on the proposed ASU, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections



© 2018 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.