Defining Issues | December 2022

 

Insight

FASB amends long-duration contracts transition guidance

Amendment to long-duration contracts improvements to exclude certain contracts or legal entities sold and derecognized.

The FASB issued an ASU to provide entities an accounting policy election to not apply the targeted improvements to the accounting for long-duration contracts standard to contracts or legal entities sold and derecognized before the effective date when the entity has no significant continuing involvement with them. The election may be applied on a transaction-by-transaction basis.

Applicability

Insurance entities in the scope of ASC 944 on accounting for long-duration contracts, excluding holders of insurance contracts and non-insurance entities.

Relevant dates 

Effective date

SEC filers, except smaller reporting companies1,2

Other entities

Annual periods – Fiscal years beginning after

Dec. 15, 2022

Dec. 15, 2024

Interim periods – In fiscal years beginning after

Dec. 15, 2022

Dec. 15, 2025

Early adoption allowed?

Yes. If early adoption is elected, the transition date is either the beginning of the prior period presented or the beginning of the earliest period presented.

1.       An SEC filer is an entity that is required to file or furnish its financial statements with either (1) the SEC or (2) with respect to an entity subject to Section 12(i) of the Securities Exchange Act of 1934, as amended, the appropriate agency under that Section. Financial statements for other entities that are not otherwise SEC filers whose financial statements are included with another filer’s SEC submission are not included in this definition. [Master Glossary]

2.       A company’s determination about whether it is eligible to be a ‘smaller reporting company’ is based on its most recent filing determination in accordance with SEC regulations as of November 15, 2019. [944-40-65-2(a)]


Key impacts

The Board amended the transition guidance provisions of its ASU on targeted improvements to the accounting for long-duration contracts. The amendments state that:

  • An entity may make an accounting policy election to exclude certain contracts or legal entities when they have been sold and derecognized before the effective date and the entity has no significant continuing involvement with them.
  • An entity is prohibited from applying the accounting policy election when it holds an interest that continues to provide significant influence over the derecognized contracts considering the guidance in paragraphs 323-10-15-6 through 15-11, including equity ownership interests that are not within the scope of that guidance or other arrangements that allow the entity significant participation in the derecognized contracts.
  • Contracts that are terminated through recaptures are not in the scope of the amendment.
  • An entity may apply the accounting policy election on a transaction-by-transaction basis to all contracts within a sale or disposal transaction that meet the accounting policy scope.
  • If the accounting policy election is made, an entity discloses a qualitative description of each sale or disposal transaction to which the accounting policy election is applied.

The amendments include examples of forms of significant continuing involvement that (1) prohibit an insurance entity from applying the accounting policy election, and (2) allow an insurance entity to apply the accounting policy election.

The amendment is effective consistent with the effective dates of the amendments in ASU 2020-11.

The Board made its decision based on outreach from insurance companies. They indicated that applying the guidance to contracts or legal entities sold and derecognized before the effective date could create operational challenges and not provide decision-useful information to financial statement users.


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