Transition adjustments and their presentation could vary depending on the contracts the insurance entity has written, reinsured, or assumed at the adoption of ASU 2018-12. For example, insurance entities must adopt the new MRB guidance in the ASU retrospectively. However, the change in accounting for the liability for future policy benefits will be adopted on either a modified retrospective basis or retrospective basis.

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) is 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).

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 11-4 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, 2024 transition date for a non-SEC filer.

Figure IG 11-4
Schedule of potential transition adjustments that may be required to be disclosed in a disaggregated tabular rollforward.

Table footnotes:

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 the 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.

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).

If a disclosure relates to a balance sheet account, the information should be provided for each period a balance sheet is presented that reflects the 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 the adoption of the ASU. For example, the liability for future policy benefits is an account on the balance sheet. For a non-SEC filer that adopts the ASU in 2025 and chooses to present a single year balance sheet, the disaggregated rollforwards and their related components, including income statement components, would only be required for the single balance sheet period presented in the financial statements (e.g., 2025). However, entities may want to present the 2024 disaggregated rollforwards since that period would not have been previously disclosed.

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.