FASB improves certain transition requirements in long-duration insurance guidance

The FASB has issued Accounting Standards Update (ASU) No. 2022-05, Financial Services-Insurance (Topic 944): Transition for Sold Contracts. ASU 2022-05 amends transition guidance in ASU No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI), for contracts that have been derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date.

Financial reporting for long-duration insurance contracts

In August 2018, the FASB issued ASU No. 2018-12 to improve, simplify, and enhance the financial reporting requirements for long-duration contracts issued by insurance entities. The amendments in ASU No. 2018-12 require an insurance entity to apply a retrospective transition method as of the beginning of the earliest period presented or the beginning of the prior fiscal year if early application is elected.

The FASB received feedback that applying the LDTI guidance to contracts that were derecognized because of a sale or disposal of individual or a group of contracts or legal entities before the LDTI effective date likely would not provide decision-useful information to investors and other allocators of capital and may result in significant operability challenges for insurance entities to apply the guidance.

Amendments to LDTI transition guidance

To address this issue, the ASU amends the LDTI transition guidance to allow an insurance entity to make an accounting policy election to exclude certain contracts or legal entities from applying the LDTI guidance when, as of the LDTI effective date, (a) the insurance contracts have been derecognized because of a sale or disposal and (b) the insurance entity has no significant continuing involvement with the derecognized contracts.

Effective dates

The amendments in ASU 2022-05 affect insurance entities that have derecognized contracts before the LDTI effective date. The LDTI effective dates are as follows:

• For public business entities that are SEC filers but not smaller reporting companies, fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early application permitted.
• For all other entities, for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025, with early application permitted.

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