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Reporting entities will need to develop the terms of each MRB that were not previously measured at fair value at inception of each contract and its fair value at the transition date. If the entity uses the attributed fee method of identifying the terms of the MRB, the basis points attributed as the fee for the benefits will be determined based on the fair value of the future benefits at contract inception, which will be some point in the past. As this attributed fee becomes a fixed term of the MRB, it is needed for the fair value measurement of the MRB in all subsequent periods. In addition, the entity-specific credit risk component will need to be identified in order to establish the adjustment to opening AOCI at the transition date.
In determining the original contract issue date attributed fee, an insurer should maximize the use of relevant observable information as of contract issuance and minimize the use of unobservable information for the appropriate date. The use of hindsight is permitted when assumptions in a prior period are unobservable or otherwise unavailable and cannot be independently substantiated.
Question IG 11-12 addresses the use of hindsight in applying retrospective method for MRBs.
Question IG 11-12
When and how can an insurance entity use hindsight when deriving the attributed fee in applying the retrospective transition for MRBs?
PwC response
In response to preparers’ concerns over the difficulties of determining the MRB attributed fees at inception, the FASB decided that insurance entities may use hindsight when assumptions in a prior period are unobservable or otherwise unavailable and cannot be independently substantiated. The overall objective in deriving the attributed fee is premised on fair value concepts, and therefore represents an accounting estimate that would have been generated at contract inception to determine the attributed fee, using all available market and internal information.
Before implementing the use of hindsight, reasonable efforts should be made to determine whether retrospective information is available from other sources, pricing models, or other models. The determination of whether the use of hindsight is allowed should be made separately for each assumption and input. When hindsight is utilized, actual historical experience (i.e., a single deterministic approach) cannot be used as the sole basis for deriving the attributed fee as to do so would be inconsistent with fair value principles, since it would ignore market participants’ consideration of volatility. As a result, when hindsight is used, considerations around volatility should be incorporated.
The information available to derive the attributed fee will vary from entity to entity, but it is important to recognize that this is an accounting estimate. Hindsight may be utilized for any assumptions, including both market assumptions (e.g., interest rate or equity volatility) and actuarial assumptions (e.g., lapse or mortality), however, it would be expected that market-based assumptions would generally be available. Additionally, it is expected that an insurance entity would use all information that was available at contract inception, even if not previously utilized. When deriving the attributed fee for MRB features that were not previously accounted for at fair value, insurance entities may be able to leverage attributed fee assumptions utilized for embedded derivative features that were accounted for at fair value provided the assumptions are appropriately adjusted to consider relevant differences between the features that may affect the valuation. This interpretation is consistent with the views expressed by the FASB staff on their November 2018 webcast, IN FOCUS: FASB Accounting Standards Update on Insurance.
Question IG 11-13
When an entity is adopting the MRB guidance in ASU 2018-12 at the transition date, is it required to use the current definition of fair value when determining the retrospective fair value of MRBs at the inception date? The fair value guidance in ASC 820 changed in 2008 to more explicitly require the consideration of margins and non-performance risk of liabilities.
PwC response
Yes. ASC 944-40-30-19c and ASC 944-40-65-2(f) require MRB measurement at fair value as defined in the FASB glossary, which is the current fair value definition incorporating ASC 820 (FAS 157) valuation considerations. Upon adoption of the MRB guidance under the ASU, which requires retrospective application, the attributed fee would need to be determined back to contract inception using the post FAS 157 (ASC 820) definition if margins and nonperformance risk were not considered in pre 2008 fair value measurements. Any resulting difference between fair value and the existing transition balance would be recognized as part of the cumulative effect adjustment upon transition (i.e., retained earnings, and AOCI for any non-performance risk adjustment).
Some entities may not have used the current definition of fair value when identifying the attributed fees for embedded derivatives that were issued prior to the adoption of ASC 820 that are now MRBs under the ASU (e.g., embedded derivatives, such as GMABs). Similarly, the attributed fee for these features would need to be redetermined back to contract inception using the current definition of fair value with any differences recognized as part of the cumulative effect adjustment.

Question IG 11-14 addresses the interaction of the fair value option and the new long duration insurance guidance.
Question IG 11-14
If an insurance entity had previously elected the fair value option for an insurance contract, is that election able to be reversed upon the adoption of the new guidance? Conversely, if an insurance entity had not previously elected the fair value option for an insurance contract, is the insurance contract eligible for the election of the fair value option upon the adoption of the new guidance?
PwC response
No. As required under ASC 825-10-25-2, the fair value option election is irrevocable unless a new election date occurs. ASC 825-10-25-4 provides election dates on which an entity may elect the fair value option, but the adoption of new accounting standard would not qualify as a new election date. Additionally, the new guidance did not provide any specific ability for an insurance entity to elect the fair value option upon adoption. However, an insurance entity may elect the fair value option for eligible new insurance and reinsurance contracts.

Question IG 11-15 addresses the retrospective transition impact on other accounts and balances affected by MRBs.
Question IG 11-15
Can the retrospective transition guidance for MRBs affect other accounts/balances such as the present value of future profits (PVFP) and result in a transition adjustment for those accounts/balances?
PwC response
Yes, retrospective application requires the insurance entity to consider the accounting as if the MRB had been accounted for upon contract issue/acquisition date. As a result, other accounts, such as SOP 03-1 balances and PVFP, may have transition impacts/adjustments as a result of the MRB retrospective transition requirements.
Consider a fact pattern whereby an insurance entity consummated a business combination in a period prior to the transition date of ASU 2018-12. As a result of the business combination, the insurer recognized a group of annuity contracts along with a PVFP asset relating to such contracts. In accordance with the required retrospective adoption for MRBs, the insurance entity applies the MRB guidance to the acquired contracts at the acquisition date. In applying the guidance, the insurance entity has identified certain MRBs in the acquired annuity contracts. The following are the liabilities and PVFP amounts at the acquisition date, pre and post adoption of ASU 2018-12 resulting from the retrospective adoption of the guidance for MRBs. The balances are taken from the business combination numerical examples in Example IG 12-2 and Example IG 12-3 in IG 12.3.3.
Acquisition date balances
Pre-adoption of ASU 2018-12
Post-adoption of ASU 2018-12
Fair value of entire group of contracts
$107,000
$107,000
Allocation of fair value between components in accordance with ASC 944-805-30-1:
Account balance liability, as proxy for the amount invested by the policyholder
$115,000
$115,000
SOP 03-1 liability pre-adoption
/MRB post-adoption
$3,000
$4,000
Total contract liability
$118,000
$119,000
PVFP = Total contract liability less fair value of entire contract
$11,000
$12,000
The acquisition date accounting would be retrospectively adjusted to increase both the total contract liability and PVFP by $1,000 as a result of the retrospective adoption of the MRB requirements. The insurance entity must consider PVFP amortization impacts since the date of acquisition as a result of changing the amount of PVFP. Additionally, the insurance entity must consider the potential impact of the change from SOP 03-1 accounting to MRB accounting on estimated gross profits and the potential resulting impact on the pattern of PVFP amortization from the acquisition date to the transition date. When PVFP is and will continue to be amortized using estimated gross profits after transition, the PVFP amortization pattern will be impacted to the extent that estimated gross profits are impacted by the MRB accounting. However, if the entity has decided to adopt the simplified DAC amortization approach for its PVFP from the transition date forward under the modified retrospective approach, we do not believe the previous PVFP amortization pattern from the acquisition date to the transition date is required to be adjusted to reflect the change in estimated gross profits as a result of full retrospective adoption for MRBs. However, the adjustment to the amortization amount each period from the acquisition date to the transition date to reflect the change in the beginning PVFP balance would result in an adjustment to retained earnings and the PVFP balance at the transition date.
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