The FASB has been focused on making targeted improvements to the insurance guidance in US GAAP as part of two distinct projects, one focused on short-duration contracts and a second focused on long-duration contracts.
Hear PwC’s Anna Kajirian discuss some new FASB guidance affecting financial services companies - specifically, short duration insurance contracts, the NAV practical expedient, and collateralized financing entities.
– Fair value accounting would be required for guarantees with other-than-nominal capital market risk that are associated with variable products, such as those offered through separate accounts. The change in fair value relating to a company’s own credit risk would be presented in OCI, with the remainder of the change presented in net income. Under existing US GAAP, some market guarantees that are related to an insurance event or otherwise fail to meet the embedded derivative definition despite their market risk are accounted for under an insurance spreading model (SOP 03-1).
– The deferred acquisition costs (DAC) amortization method will be simplified. DAC would be amortized over the expected life of a book of contracts in proportion to the amount of insurance in-force, or on a straight-line basis if the amount of insurance in-force is variable and cannot be reliably predicted or is otherwise not readily determinable. In computing amortization, no interest would accrue to the undiscounted balance of capitalized acquisition costs and DAC would not be subject to a recoverability test.
– Additional disclosures will be required, including disaggregated rollforwards of liability balances and DAC, and qualitative as well as quantitative information about estimates and assumptions.
– The following transition provisions would be required: