On June 6, 2018, the Financial Accounting Standards Board (FASB) agreed to a set of amendments based on proposed Accounting Standards Update (ASU) 2016-330, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, which was issued for public comment in September 2016.
FASB has made several changes to proposed ASU 2016-330 since its issuance and put the finishing touches on the changes at the June 6 meeting. Under existing standards, when an insurer sells a life insurance policy, the policy’s price is based on the policyholder’s current health and family history using complex calculations about life expectancy and other assumptions. These assumptions are then set for the remainder of the policy’s life, which means calculations about future liabilities are years—or even decades—out of date. The amendments to ASU 2016-330 will correct that defect. The proposed changes also will simplify how insurers amortize costs to acquire new policyholders and will change how to measure insurance policies with investment features that protect customers from losses.
FASB also addressed one of the biggest sticking points for several insurance companies—the method by which they must update their cash flow assumptions. In November 2017, FASB agreed insurers must use a retrospective method to catch up for revised assumptions. In response to criticism from interested parties, FASB has clarified that insurers won’t be required to make quarterly updates to cash flow assumptions. Rather, the new standard is anticipated to state that cash flow assumptions should be reviewed on an annual basis and only updated if evidence suggests changes to the assumptions are necessary.
The new standard is expected to be issued in August and will go into effect for public companies for fiscal years and interim periods within those years beginning after December 15, 2020, which will mean 2021 for most calendar-year businesses. Private companies won’t have to follow the new accounting until fiscal years beginning after December 15, 2021. Early application will be permitted.
Contact Meagan or your trusted BKD advisor if you have questions.