The Financial Accounting Standards Board (FASB) says it wants to postpone the compliance deadlines for a major new batch of accounting rules.
The move could affect financial reports for life insurance policies, annuities, long-term disability insurance policies, long-term care insurance policies, and many other “long-duration insurance contracts.”
The announcement of the shift, which came out Wednesday, may have led many financial professionals to squint at their screens, briefly, and then click on the link to the weekend weather report.
But, over the next few years, what happens to FASB Accounting Standards Update 2018-12 could have effects on life insurance agents and brokers that will last a lot longer than the effects of this weekend’s weather.
Here are five things for financial professionals to know about the proposed ASU 2018-12 delay.
1. This is mainly about how much Wall Street investors smile at, or yell at, publicly traded life insurers.
All U.S. life insurers prepare financial statements according to state insurance regulators’ Statutory Accounting Principles.
Life Insurers that sell stock or bonds to the public — in other words, use, or have used, money from ordinary investors to finance their activities — also prepare financial statements according to FASB’s U.S. Generally Accepted Accounting Principles (GAAP) rules.
Today, under GAAP rules, life insurers record how much they think the benefits they have sold will be worth when they sell policies. They normally can leave those estimates in place until the policy lapses, or they pay the benefits.
Under the ASU 2018-12 rules, life insurers would have to give investors annual updates on how think the value of the benefits they have promised has changed. A life insurer would put the changes on its “bottom line” — in the net income figure.
Because the value of the total promised future benefits is usually bigger than a life insurer’s annual revenue, and much bigger than the life insurer’s annual net income, even a 1% cut in the estimated value of the future benefits could lead to big cut, or a big increase, in net income.
The new FASB proposal announced Wednesday could put off the ASU 2018-12 compliance deadline for the biggest publicly traded life insurers to January 2022, from January 2021.
For other affected life insurers, the compliance deadline could move to January 2024, from January 2021, or to January 2024, from January 2022.
2. The proposed deadline change is just a proposal.
FASB is asking for public comments on the proposal. Comments are due Sept. 20.