At a glance
The FASB has voted to propose a deferral of the effective date of the long-duration contracts standard by one year and to align the early adoption transition date with the standard adoption transition date. An exposure draft is expected in July with a 45-day comment period.
At its June 10 meeting, the FASB voted to propose a one-year deferral of the effective date of ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts in response to implementation challenges resulting from COVID-19. Calendar year-end SEC filers other than smaller reporting companies (SRCs) will be required to adopt ASU 2018-12 on January 1, 2023. Other calendar year-end entities will be required to adopt the ASU on January 1, 2025. Early application would still be permitted.
The FASB decided to defer the effective date of ASU 2018-12 based on outreach conducted after an agenda request in March from an insurance industry association to consider a delay by at least one year due to the COVID-19 pandemic. Input from insurers and other stakeholders highlighted the industry’s concern that the pandemic limited insurers’ ability to devote necessary resources to effectively implement the new guidance, especially in light of changed work environments. Five of the seven FASB members voted in favor of the proposal, and the incoming chair (who officially starts his position on July 1 when the final vote on the deferral will be taken) voiced his support as well.
In addition to the deferral of the standard’s effective date, the FASB also voted to propose alignment of the transition date for early adopters. Using SEC filers (other than SRCs) as an example, this will allow insurers planning for a January 1, 2022 adoption date, but that are uncertain about the impacts of the pandemic on their plans, some flexibility in selecting their adoption date without having to change their transition date measurements. That is, whether they adopt on January 1 in 2022 or 2023, their transition date calculations would be as of January 1, 2021. All Board members voted in favor of this proposal.
Lastly, the Board voted not to add to the agenda a project to propose an alternative effective date for certain reinsurance contracts due to the staggered effective dates between SEC filers that are not SRCs and all other entities that are their counterparties. The Board commented that its outreach had revealed that this issue is not pervasive and is an operational and contract enforcement issue rather than a technical accounting issue.
Why is this important?
The proposed deferral addresses the insurance industry’s concerns that the pandemic will impact their ability to effectively implement the new guidance. With the additional year, insurers can hopefully devote the necessary resources to implement their envisioned modernization plans aimed at providing more useful, transparent information to investors and customers in the long term.
The FASB staff will draft the proposed amendment to defer the effective date of ASU 2018-12 and provide it to the FASB to vote by written ballot, after which it is expected to be exposed in July with a public comment period of 45 days. We expect the FASB to issue the final amendment in late fall.