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LI 13.2.1 describes a transition-related matter for insurance companies that adopted the recognition and measurement guidance, and LI 13.2.2 describes the transition provisions of ASU 2020-01.

13.2.1 Insurance companies using the measurement alternative

Insurance companies previously accounted for equity securities without a readily determinable fair value under ASC 944, Financial Services – Insurance. ASC 944-325 required the securities to be accounted for at fair value with changes in fair value recorded in other comprehensive income. Under the recognition and measurement standard, an insurance company can elect the measurement alternative for those equity investments. If an insurance company elects the measurement alternative, the guidance should be applied prospectively.
Any amounts recorded previously in AOCI will be released to earnings on a prospective basis. Insurance companies should adopt an appropriate methodology for the subsequent accounting for the balances in AOCI that is logical and consistently applied to all securities accounted for using the measurement alternative. We believe each of the following alternatives are acceptable:
  • AOCI is “frozen” and fully released when the security is sold. Consistent with the recognition and measurement standard, all impairments and adjustments for observable transactions occurring subsequent to the adoption date would be recorded through earnings.
  • AOCI is fully released at the first instance of identified impairment or an observable transaction.
  • AOCI is released incrementally to the extent that changes recorded under the equity securities’ fair value model are “opposite” of the amounts in AOCI. For example, if a security was in an unrealized gain position at the adoption date and there is a subsequent impairment identified, the entity would release the portion of AOCI that offsets the amount of the impairment. If the impact of the impairments exceeds the amount deferred in AOCI, the excess would be recorded in current period earnings. In contrast, if the same security was in an unrealized gain position at the adoption date and had an observable transaction indicating an increase in its fair value, the AOCI would remain unchanged and the gain would be recorded in current period earnings.
There may be other acceptable alternatives for the subsequent accounting of the related AOCI. However, subsequent to derecognition, including sale, there should be no remaining AOCI related to the derecognized equity security. An insurance company’s accounting policy should be disclosed in the notes to the financial statements.

13.2.2 ASU 2020-01 transition

A reporting entity shall apply ASU 2020-01 on a prospective basis at the beginning of the interim period that includes the adoption date.
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