BC1. The following summarizes the Board’s considerations in reaching the conclusions in this Update. It includes reasons for accepting certain approaches and rejecting others. Individual Board members gave greater weight to some factors than to others.
BC2. In August 2018, the Board issued Update 2018-12 to improve, simplify, and enhance the financial reporting requirements for long-duration contracts issued by insurance entities. For public business entities, LDTI originally would have been effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early application permitted. For all other entities, LDTI originally would have been effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, with early application permitted.
BC3. In November 2019, the Board issued Update 2019-09, which deferred the original effective date of LDTI for all entities as follows, with early application permitted:
For public business entities that meet the definition of an SEC filer (per the Codification’s Master Glossary definition), excluding entities eligible to be SRCs as defined by the SEC, the guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The one-time determination of whether an entity is an SRC is based on an entity’s most recent determination as of November 15, 2019, in accordance with SEC regulations.
For all other entities, the guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.
BC4. In consideration of the implications of the COVID-19 pandemic on an insurance entity’s ability to effectively implement LDTI, the Board issued a proposed Accounting Standards Update, Financial Services—Insurance (Topic 944): Effective Date and Early Application, on July 9, 2020, to provide (a) additional time for implementation by deferring the LDTI effective date by one year for all insurance entities and (b) transition relief to facilitate early application of LDTI and encourage accelerated delivery of better information to investors and other financial statement users. The Board received 28 comment letters in response to that proposed Update. Overall, respondents unanimously supported the proposed amendments to defer the effective date of the amendments in Update 2018-12 and to modify the early application guidance.
Benefits and Costs
BC5. The objective of financial reporting is to provide information that is useful to present and potential investors, creditors, and other capital market participants in making rational investment, credit, and similar resource allocation decisions. However, the benefits of providing information for that purpose should justify the related costs. Present and potential investors, creditors, and other users of financial information benefit from improvements in financial reporting, while the costs to implement new guidance are borne primarily by present investors. The Board’s assessment of the costs and benefits of issuing new guidance is unavoidably more qualitative than quantitative because there is no method to objectively measure the costs to implement new guidance or to quantify the value of improved information in financial statements.
BC6. Overall, the Board concluded that the expected benefits of the amendments in this Update will justify the expected costs. The amendments defer the LDTI effective date and provide transition relief for insurance entities. Therefore, the Board does not anticipate that entities will incur significant costs, if any, as a result of the amendments.
BC7. The Board does recognize that a second deferral of LDTI further delays the benefit to financial statement users from receiving more decision-useful information, particularly during a global pandemic and a prolonged period of low interest rates. However, the Board notes that absent an effective date deferral, some insurance entities may have insufficient time or resources to provide a quality implementation for financial statement users. For those entities, the additional time provided should improve the financial reporting for financial statement users once LDTI becomes effective.
BC8. Additionally, the Board recognizes that some insurance entities may decide to continue with their existing plans to adopt LDTI under their current timelines while managing the business disruption effects of COVID-19. The amendments in this Update to facilitate early application of LDTI should provide relief to those entities, thereby providing those entities with greater opportunity to furnish the more decision-useful information to users without further delay.
Basis for Conclusions
Effective Date Deferral
BC9. The Board decided to defer the effective date of LDTI for all entities by one year in this Update. For SEC filers, excluding entities eligible to be SRCs as defined by the SEC, LDTI is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022. For all other entities, LDTI is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025.
BC10. The Board and its staff performed outreach with insurance entities and public accounting firms to understand the extent to which COVID-19 has disrupted LDTI implementation efforts. Insurance entities have experienced some degree of business disruption since the onset of the pandemic, and most were expecting that disruption to persist in some form well into the future. Therefore, these long-term disruptions necessitate a permanent recalibration of implementation plans over the remaining adoption period to reflect the new working environment.
BC11. Specifically, most insurance entities indicated that a one-year deferral of the LDTI effective date would provide enough time to resolve experienced disruptions and provide sufficient buffer for potential future or long-term disruptions caused by COVID-19, making additional future deferrals unnecessary. Public accounting firms provided similar observations, noting that they have not observed major delays in implementation timelines and that the COVID-19 pandemic has resulted in work inefficiencies rather than complete work stoppages. Also, responses to recent industry surveys conducted after the onset of the pandemic imply that most insurance entities remain largely on track with LDTI implementation.
BC12. Several insurance entities allocated the extra time provided by the 2019 deferral to back-end matters such as parallel testing and dry runs; those entities have made strong progress and, while COVID-19 has resulted in some inefficiencies, they have some flexibility in their timelines. Therefore, those entities are not significantly behind schedule. In contrast, other insurance entities allocated the extra time provided by the previous deferral to front-end matters such as systems design or accounting policy decisions and, therefore, have yet to fully complete milestones in the early stages of their implementation timelines. COVID-19 is having a more significant effect on those entities.
BC13. In addition, comment letter respondents to the proposed Update were unanimously supportive of a one-year deferral of LDTI for all entities. Those respondents generally noted that a one-year deferral should ultimately result in improved transparency to investors in the form of increased quality, comparability, and usability of financial statements. Comment letter respondents also noted that a one-year deferral should increase confidence that resources will be able to fully return to their implementation efforts while working through unexpected challenges and disruptions brought on by COVID-19.
BC14. After considering outreach feedback and comment letter responses, the Board decided that a one-year deferral provides sufficient time to address the current and potential future COVID-19-related disruptions on implementation timelines.
Early Application Transition Relief
BC15. The Board decided to provide early application transition relief whereby an insurance entity that chooses to early adopt LDTI may do so as of the beginning of the prior period presented or as of the beginning of the earliest period presented. For example, a large calendar-year public insurance entity could reflect LDTI as of January 1, 2021 (and record a transition adjustment as of that date) (a) in its 2022 financial statements if the entity elects early application or (b) in its 2023 financial statements if the entity does not elect early application.
BC16. The objective of the early application transition relief is to provide interrelated benefits including certainty and flexibility for insurance entities while encouraging the early application of LDTI to accelerate the delivery of better information to investors and other financial statement users.
BC17. An insurance entity should benefit from having certainty about the transition date because the transition date is independent of whether an insurance entity chooses to early adopt LDTI. That certainty should enable an insurance entity to calculate and analyze its LDTI transition adjustment early in its implementation process, while maintaining the flexibility to decide at a later date whether it may want to early adopt the LDTI guidance. Given the remaining uncertainty around the lasting effects of the COVID-19 pandemic, together with feedback from many insurance companies that they remain largely on track with their implementation plans, the Board concluded that the certainty and increased flexibility provided by the early application amendments in this Update should enable those entities to adjust their implementation plans with greater agility in response to the effects of the pandemic. The Board observed that insurance entities have an economic incentive to move forward and adopt the LDTI guidance as quickly as possible and that doing so may demonstrate industry leadership, which could be viewed positively by their investors.
BC18. Additionally, investors and other financial statement users should benefit from an insurance entity electing to early adopt the LDTI guidance because users will receive more transparent and decision-useful information earlier than they otherwise would have under the deferred effective date in this Update. The Board acknowledged that the expected cost of improving the operability of the early application guidance is to reduce the number of comparable reporting periods from two to one; however, the expected benefit of providing better information to investors one year earlier than the amended effective date justifies the adverse consequence of having one less year of comparability.
BC19. Originally, the amendments in the proposed Update would have required that the early application transition date be the beginning of the prior period presented. However, the Board received feedback that certain entities, such as a nonpublic subsidiary whose parent company is an SEC filer, may want to early adopt LDTI for the nonpublic subsidiary’s standalone financial statements as of the earliest period presented to align the transition date of the nonpublic subsidiary’s standalone financial statements with that of its parent company. The proposed amendments would have restricted the nonpublic subsidiary to early adopting LDTI as of the beginning of the prior period, which could have necessitated additional calculations and disclosures. In consideration of that feedback, the Board decided in this Update to make the transition relief optional, such that the early application date can be either the beginning of the prior period presented or the beginning of the earliest period presented.