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ASC 944-40-65-2(d) requires market risk benefits to be measured at fair value at the transition date via a retrospective application. The contract features that now meet the definition of a market risk benefit (MRB) 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 benefits or death or other insurance benefits under ASC 944. The transition adjustment representing the difference between the pre-adoption carrying amounts of contract features that meet the definition of an MRB and any pre-adoption host adjustments for features accounted for as derivatives and fair value of the MRB at the transition date, excluding the effect of changes in the instrument-specific credit risk relating to the MRB valuation, is recognized as an adjustment to the opening balance of retained earnings. For example, if an insurance entity identifies an option-based MRB (i.e., it has a fair value of other than zero at inception), the transition adjustment should reflect any adjustments to the host insurance or investment contract as well as the reversal of any previously existing SOP 03-1 liability. The cumulative effect of changes in the instrument-specific credit risk of the MRB between contract issuance date and the transition date is recognized in the opening balance of AOCI.
If an insurance entity adopted the new DAC guidance using a modified retrospective transition approach, we do not believe that DAC amortization prior to the transition date is required to be adjusted to reflect the revised estimated gross profits pattern that would have resulted from full retrospective adoption for MRBs. Similar considerations would apply to other balances amortized on a basis consistent with DAC, either as required or as a result of a policy election, such as PVFP. Question IG 11-15 in IG 11.3.8 addresses the retrospective transition impact on PFVP affected by MRBs.

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