Defining Issues | September 2022

 

Insight

FASB affirms ASU 2018-12 transition guidance amendment

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

On September 21, 2022, the FASB reaffirmed its tentative decision to allow entities an accounting policy election to not apply the targeted improvements to the accounting for long-duration contracts standard in certain circumstances, and amended its proposed view on application of the accounting policy election.

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

  • July 14, 2022 – Exposure draft issued
  • September 21, 2022 – FASB meeting 

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 affirmed its tentative decision to amend the transition guidance provisions of its ASU on targeted improvements to the accounting for long-duration contracts.

  • An entity would be allowed to 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 continuing involvement.
  • Examples would be provided of forms of continuing involvement that would (1) prohibit an insurance entity from applying the accounting policy election, or (2) allow an insurance entity to apply the accounting policy election.
  • An entity would be allowed to 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, disclosure of that fact plus a qualitative description of the sale or disposal transaction would be required.
  • The amendment would be effective consistent with the effective dates of the amendments in ASU 2020-11.

During the meeting, the Board:

  • Rejected feedback to clarify the scope to include contracts that are terminated through recaptures.
  • Tentatively decided to clarify that significant continuing involvement is demonstrated by holding an interest that provides significant influence that exposes the insurance entity to the risk and rewards of the derecognized contracts, as described in paragraphs 323-10-15-6 to 15-11.
  • Tentatively decided to allow an entity to apply the accounting policy election on a transaction-by-transaction basis instead of requiring consistent application to all contracts meeting the scope.

The Board instructed the staff to prepare a final ASU for vote by written ballot.

The Board made its decision to prepare an amendment 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.


Related content

Subscribe to our newsletter

Receive timely updates on accounting and financial reporting topics from KPMG.

Receive timely updates on accounting and financial reporting topics from KPMG.

ARO

Use our Accounting Research Online for financial reporting resources.

Use our Accounting Research Online for financial reporting resources.