A new rule finalized by the Financial Accounting Standards board deferred the effective date of the updated long-term insurance standard again. The intention of the FASB is to allow more time for insurers to implement changes during COVID-19.
What is changing
The Accounting Standards Updated is the result of 12 years of work. (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts was issued in August 2018 to simplify the complicated reporting requirements for long-term insurance policies, and targeted disability income, life insurance, long-term care and annuity payouts.
The update requires insurers to:
- Review the assumptions they make about policyholders annually, and
- Update the liabilities on balance sheets should assumptions change.
The updated guidance requires companies to measure updated liabilities using a standardized, market-observable discount interest rate that is based on the yield from an upper-medium-grade, fixed-income instrument. This a more conservative approach than the one previously used.
Deferred, and deferred again
The original effective dates for the updated standard were December 15th, 2020 for public companies and December 15th, 2021 for private companies.
In November 2019, however, the standard’s effective dates were moved to 2022 for public companies and 2024 for private companies, smaller reporting companies, and nonprofits in order ot give insurance companies more time to update their methodology, conduct staff trainings, and reach out to investors.
The American Council of Life Insurers (ACLI) requested an additional delay in March because of challenges related to COVID-19. The organization said that because the pandemic’s effects are still increasing, it is unclear how long the capital markets will remain turbulent.
The FASB agreed to push the effective date 2023 for public companies and to 2025 for other organizations.
How we help
These are difficult times, and the FASB has been sympathetic to that. On top of pushing back the effective dates for the updated long-term insurance standard, the FASB also postponed the updated revenue recognition and lease rules. Reach out for more information, or for help implementing changes in your organization.
More time: FASB delays long-term insurance standard … again
On September 30, the Financial Accounting Standards Board (FASB) finalized a rule to defer the effective date of the updated long-term insurance standard for a second time. The deferral will give insurers more time to properly implement the changes amid the COVID-19 pandemic.
Need for change
After 12 years of work, the FASB issued Accounting Standards Update (ASU) No. 2018-12, Financial Services — Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, in August 2018 to improve and simplify the highly complex, nuanced reporting requirements for long-term insurance policies. The rules were designed to simplify targeted areas in reporting life insurance, disability income, long-term care and annuity payouts.
Specifically, the update requires insurers to:
- Review annually the assumptions they make about their policyholders, and
- Update the liabilities on their balance sheets if the assumptions change.
Under the updated guidance, insurance companies must measure updated liabilities using a standardized, market-observable discount interest rate based on the yield from an upper-medium-grade, fixed-income instrument. The method required by ASU No. 2018-12 is a more conservative approach than one used for insurance policies under existing guidance.
Requests for deferral
When the updated standard was issued, the original effective dates were fiscal years beginning after December 15, 2020, for public companies and a year later for private companies. In November 2019, the FASB postponed the standard’s effective dates from 2021 to 2022 for public companies and from 2022 to 2024 for smaller reporting companies (SRCs), private companies and not-for-profit organizations. This delay was designed to give insurance companies more time to update their software and methodology, train their staff, and conduct educational outreach to investors.
In March, the American Council of Life Insurers (ACLI), the trade organization that represents the sector, requested an additional delay, citing unprecedented challenges stemming from the COVID-19 crisis. The ACLI told the FASB that the impacts of the pandemic continue to escalate, with little clarity about how long the capital markets may persist within their current turbulent state.
During a recent meeting, the FASB voted 6-to-1 to postpone the effective date from 2022 to 2023 for large public companies and from 2024 to 2025 for other organizations.
We can help
The FASB has been sympathetic to companies that have been trying to navigate major accounting rule changes during these uncertain times. In addition to deferring the updated rules for long-term insurance contracts, the FASB in May postponed the effective dates for the updated revenue recognition and lease rules for certain entities. Contact us for more information about impending deadlines or for help implementing accounting rule changes that affect your organization.
Please reach out to your trusted Smolin Professional with any questions or concerns.