AICPA groups recommend field-testing of FASB long-duration insurance proposal

By Ken Tysiac

The AICPA Financial Reporting Executive Committee (FinREC) and the AICPA Insurance Expert Panel recommended that FASB field-test its proposed targeted improvements to accounting for long-duration insurance contracts before finalizing them.

In a joint comment letter sent Wednesday, FinREC and the Insurance Expert Panel supported FASB’s efforts to improve the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity.

The AICPA supported the updating of cash flow assumptions for nonparticipating contracts but said it shares a general concern with the insurance industry that the proposed model would not result in accounting for participating contracts that appropriately reflects the underlying economics.

Because of the unique characteristics of participating contracts, the AICPA does not endorse FASB’s proposal to have them follow the same accounting model as nonparticipating contracts.

FASB proposed that a high-quality fixed-income instrument yield is a practical expedient that aligns with its objective of requiring a discount rate for nonparticipating contracts that reflects the risk-free rate of the insurance liabilities, adjusted for liquidity. The AICPA recommended that FASB perform further study and additional outreach to identify an appropriate index or published rate that more closely aligns with the principle implicit in the proposal that the discount rate should reflect the risk-free rate of the insurance liabilities, adjusted for liquidity for nonparticipating contracts.

FASB’s proposed simplified approach for amortization of deferred acquisition costs was endorsed by the AICPA, which requested that the board consider providing clarification on the accounting for various situations related to this topic.

The AICPA suggested that FASB provide a practical expedient to the retrospective transition for market risk benefits and recommended that the board perform outreach with preparers to get a better idea of how a retrospective transition approach would affect implementation.

In addition, the majority of the AICPA Insurance Expert Panel members believe that some of the proposed disclosures are excessive, are not appropriate for financial statement footnotes, or do not provide decision-useful information.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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