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Transition adjustments and their presentation could vary depending on the contracts the insurance entity has written, reinsured, or assumed at the date of adoption of ASU 2018-12. For example, insurance entities must adopt the new MRB guidance in the ASU retrospectively and the changes in the accounting for the liability for future policy benefits on either a modified retrospective basis or retrospective basis, if certain criteria are met.
The transition date adoption methodology for some changes (e.g., impact of the discount rate change on certain deferred annuity contracts with non-traditional annuitization benefits that are required to be accounted for under ASC 944-40-30-26) are not specifically mentioned in the transition guidance in ASC 944-40-65. In the absence of any specific guidance, ASC 250, Accounting Changes and Error Corrections, requires retrospective application, as outlined in ASC 250-10-45-3 through ASC 250-10-45-5. Under this approach, the cumulative effect of the change on periods prior to those presented would be reflected in the carrying amount of the liability at the transition date. An offsetting adjustment would be made to the opening balance of retained earnings.
Specific disclosures are required in the period in which a reporting entity adopts ASU 2018-12. A reporting entity must include the following disclosures in accordance with ASC 944-40-65-2(g) and ASC 944-40-65-2(h).
  • Disaggregated tabular rollforwards of the ending balances of the reporting period prior to the transition date to the opening balances at the date of transition for selected insurance-related carrying amounts (e.g., future policyholder benefits, MRBs, DAC, additional liabilities for annuitization, death, or other insurance benefits). The level of disaggregation is required to be consistent with the disaggregated rollforwards required for annual and interim reporting periods.
  • Qualitative and quantitative information about transition adjustments related to retained earnings, accumulated other comprehensive income, premium deficiencies, and other transition adjustments.
If a reporting entity meets the criteria outlined in ASC 944-40-65-2(e) and elects to adopt the ASU for the liability for future policy benefits and DAC (and balances amortized on a basis consistent with DAC) on a retrospective basis for certain contract issue years and a modified retrospective basis for earlier contract issue years, the disaggregated rollforwards of the transition adjustments must be further disaggregated between the effects of retrospective application and modified retrospective application.
Figure IG 10-10 outlines the potential transition adjustments to be recorded and disclosed upon the adoption of the ASU under both the modified retrospective and retrospective transition methods assuming a January 1, 2020 transition date.
Figure IG 10-10
Schedule of potential transition adjustments that may be required to be disclosed in a disaggregated tabular rollforward.
Balance
Adjustment due to liability (or asset) upon adoption of the ASU
Where the offsetting impact on equity is recorded
Liability for future policy benefits
Pre-adoption 12/31/2019 balance
+/- Adjustments for the removal of any “shadow” adjustments
Opening AOCI
+ Adjustments for loss contracts (with net premiums in excess of gross premiums) under the modified retrospective approach
Opening retained earnings
+/- Adjustments for the cumulative effect of adoption of the new measurement guidance under the retrospective method for contract issue years from 20XX through 2019
Opening retained earnings
+/- Effect of the remeasurement of the liability at current single A rate
Opening AOCI
Post adoption 1/1/2020 balance
MRBs
Pre-adoption 12/31/2019 carrying amount for features now classified as MRBs (1)
+/- Adjustments for the removal of any “shadow” adjustments
Opening AOCI
+/- Adjustments for the cumulative effect of the changes in the instrument-specific credit risk between the original contract issuance date and the transition date
Opening AOCI
+/- Adjustments to the host contract for differences between previous carrying amount and fair value measurement for the MRB under the option based method of valuation (2)
Opening carrying amount of host contract
+/- Adjustments for the remaining difference (exclusive of the instrument specific credit risk change and host contract adjustments) between previous carrying amount and fair value measurement for the MRB
Opening retained earnings
Post adoption 1/1/2020 balance
DAC (or other balances amortized on a basis consistent with DAC)
Pre-adoption 12/31/2019 balance
+/- Adjustments for the removal of any “shadow” adjustments
Opening AOCI
+/- Adjustments for the cumulative effect of adoption of the simplified amortization methodology under the retrospective method for contract issue years 20XX through 2019
Opening retained earnings
Post adoption 1/1/2020 balance
Other impacts (e.g., additional liability for annuitization, death, or other insurance benefits)
Pre-adoption 12/31/2019 balance classified as additional liabilities (3)
+/- Adjustments for the removal of any “shadow” adjustments
Opening AOCI
+/- Adjustments for the cumulative effect of adoption of the ASU (4)
Opening retained earnings
Post adoption 1/1/2020 balance
Table footnotes:
  1. The pre-adoption balance as of 12/31/2019 for MRBs represents the contract features that meet the definition of an MRB under ASU 2018-12 and the related carrying amount of those features prior to the ASU. Those contract features may have previously been accounted for at fair value as a derivative or embedded derivative under ASC 815 or as an additional liability for annuitization, death, or other insurance benefits under ASC 944.
  2. If an insurance entity has an option-based MRB, then the initial fair value would have been other than zero at inception. Therefore, a retrospective transition adjustment would be required to the host insurance or investment contract. Refer IG 11.3.9 for further discussion of transition impact of MRBs.
  3. The pre-adoption 12/31/2019 balance for the additional liability for annuitization, death, or other insurance benefits as of 12/31/2019 represents the amount that will continue to follow the additional liability model under ASC 944-after adoption of the ASU.
  4. The ASU changed the calculation of assessments used as the denominator in the benefits ratio for the additional liability for death or other insurance benefits (commonly referred to as “SOP 03-1 liability”). The transition for the change is retrospective. Refer to IG 5.8 for further guidance related to the calculation of assessments used as the denominator in the benefits ratio for the additional liability for death or other insurance benefits.
Question IG 10-7
Is a disaggregated tabular rollforward required of the ending balances of the reporting period prior to the transition date to the opening balances at the date of transition for reinsurance recoverables impacted by the adoption of ASU 2018-12?
PwC response
Reinsurance recoverables are impacted by the adoption of the ASU because of the changes in the liability for future policy benefits and market risk benefits for the direct insurance contracts. Reinsurance recoverables related to the liability for future policy benefits have the same transition method as the liability for future policy benefits given that ceded reinsurance recoverables are required to be recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. Reinsured MRBs are required to be carried at fair value after adoption of the ASU and must follow the retrospective adoption method similar to MRBs for the direct contracts.
The ASU is silent as to whether disaggregated rollforwards and other transition disclosures are required for the reinsurance recoverables impacted by the adoption of ASU 2018-12. Given the spirit of the ASU and the existing guidance in ASC 250 is to provide clear disclosure as to the effects of the changes, we believe rollforwards for reinsurance recoverables should be considered when such information is material to the users of the financial statements.

Question IG 10-8
Are SEC registrants required to provide all annual disclosure requirements of the ASU for each interim period in the initial year of adoption?
PwC response
Yes. Regulation S-X, Article 10 requires registrants to disclose material matters that were not disclosed in the most recent annual financial statements. Accordingly, when a registrant adopts the ASU in the first quarter, the registrant is expected to provide both the annual and the interim period disclosures prescribed by the standard, to the extent not duplicative. These disclosures should be included in each quarterly report in the year of adoption (that is, in the registrant’s first, second, and third quarter Form 10-Q filings).
Question IG 10-9
The ASU requires various quantitative disclosures. For which period should these disclosures be provided?
PwC response
If a disclosure relates to a balance sheet account, the information should be provided for each period a balance sheet is presented that reflects adoption of the ASU. If a disclosure relates to an income statement account, the information should be provided for each period an income statement is presented that reflects adoption of the ASU. For example, the liability for future policy benefits is an account on the balance sheet. For an SEC filer that adopts the ASU in 2021, the disaggregated rollforwards and their related components, including income statement components, would only be required for the two balance sheet periods presented in the financial statements (e.g., 2021 and 2020). However, entities may want to present the 2019 disaggregated rollforwards since that period would not have been previously disclosed.
Question IG 10-10
What information should SEC registrants disclose about the expected impact of the ASU prior to adoption (SAB 74 disclosures)?
PwC response
SEC registrants are required to disclose both quantitative and qualitative information regarding the expected impact of adopting the ASU. These disclosures should evolve and become more detailed as registrants progress in their implementation and should be aligned with information communicated to audit committees and investors.
SEC registrants should disclose known or reasonably estimable quantitative information about the expected impact of the ASU, even if such information is only available for a particular subset of the SEC registrant’s products (e.g., impact of the change in DAC amortization or impact of recording MRBs at fair value). When assessing whether the impact of the ASU on an SEC registrant’s financial statements is material, registrants should consider the new disclosures required by the standard in addition to the impact on the recognition, measurement, and presentation of insurance contracts.
If an SEC registrant does not know or cannot reasonably estimate the expected financial statement impact, then in addition to making a statement to that effect, the registrant should consider additional qualitative disclosures to assist the reader in assessing the impact of the ASU. Additional qualitative disclosures should include a description of the effects of the accounting policies that the SEC registrant anticipates applying, if determined, and a comparison to the SEC registrant’s current accounting policies. For example, if an SEC registrant has not yet completed its analysis of the impact of the new ASU on its liability for future policy benefits for traditional insurance and limited-payment contracts, it should consider disclosing, at a minimum, the transition method expected to be elected (or if not yet known, transition alternatives being considered) and that the ASU will have an impact on the entity’s results as it requires insurance assumptions to be updated at least annually with a retrospective catch up adjustment recorded for the impact of those changes to assumptions, which will result in different timing of profit emergence. An SEC registrant should also describe the status of its process to implement the new standard and the significant implementation matters yet to be addressed.
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