AICPA Comments on FASB’s Proposed ASU on Accounting for Long-Duration Contracts Issued by Insurers

The Financial Reporting Executive Committee (FinREC) and the Insurance Expert Panel of the American Institute of CPAs (AICPA) have submitted comments on the Financial Accounting Standards Board’s (FASB) Proposed Accounting Standards Update (ASU), Financial Services – Insurance (Topic 944) – Targeted Improvements to the Accounting for Long-Duration Contracts.

In a December 14 letter to FASB, FinREC and the Insurance Expert Panel expressed support for the Board’s efforts to improve the existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity, provided comments and observations on specific sections of the proposed ASU and strongly recommended that the Board formally field test the targeted improvements before finalizing.

The AICPA’s observations included:

“Updating of assumptions for non-participating contracts: We support the updating of cash flow assumptions, recognizing that it provides more relevant information for users than today’s “locked in” approach.  We believe that the prospective approach is the preferred approach for updating cash flow assumptions.

“Discount rate for non-participating contracts: We agree with the principle implicit in the proposed ASU that the discount rate should reflect the risk free rate of the insurance liabilities, adjusted for liquidity.  That said, we do not believe that a high-quality fixed-income instrument yield (interpreted as a AA rate) is a practical expedient that reflects this objective.  We suggest that the Board perform further study and additional outreach to preparers and users to identify an index or other published rate that more closely aligns with this objective.

“Participating contracts: We share a general concern with the industry that the proposed single model would not result in an accounting for participating contracts that appropriately reflects the underlying economics.  The Board is proposing that participating contracts follow the same accounting model as non-participating contracts; however, given the unique characteristics of these products, we do not believe that this approach works.  We recommend that the Board consider certain industry proposals being put forth to address these concerns.”

The letter was signed by FinREC Chair James Dolinar and Insurance Expert Panel Chairs Steve Belcher and Richard Sojkowski.