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Perspectives

Targeted improvements to the accounting for long-duration contracts

The 1-2-3s of the implementation journey

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2018-12, often referred to as targeted improvements for long-duration contracts. But ASU 2018-12 introduces new reporting complexities and will require more integration of finance and actuarial teams across processes and systems. Meeting the standard will be a challenging multiyear effort, but as with any major change, the ASU presents opportunities to achieve business goals and improvements.

A collection of articles and insights to help you prepare for FASB ASU 2018-12

On June 10, 2020, the FASB voted to propose a deferral of one year for the effective date of ASU-2018 for all SEC filers to January 1, 2023, with an option to early adopt. The effective date for non-public insurers is also deferred one year to January 1, 2025. The FASB considered that insurers could face pressure on the implementation timeline due to uncertainty of the prolonged nature and impact of COVID-19. The new effective date for SEC insurance filers adhering to US GAAP is now coincidentally aligned with the IFRS 17 effective date. 


 

 

Targeted improvements for long-duration contracts: Supplementary controls under long-duration targeted improvements (LDTI)

Ready or not, the Financial Accounting Standards Board’s Accounting Standard Update (ASU) No. 2018-12 is bringing significant change to the finance and actuarial functions across insurance institutions. The implications of change have far-reaching impacts across the record-to-report continuum. Adopters will be faced with the rewrite of accounting policies, deployment of new actuarial methods, and reconfiguration and deployment of IT infrastructure to support connectivity of data for reporting.

During the transition and restatement period, it is imperative that finance and actuarial functions demonstrate a well-controlled environment. To complement existing and enhanced controls and add a layer of assurance in mitigating unforeseen control failures, adopters should consider supplementary or one-time controls. In this article, explore three examples of potential supplementary or one-time controls that can benefit your organization: actuarial analytics, overarching chart of accounts change management governance, and GAAP-to-LDTI bridge schedule reports.

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Redesigning the financial reporting process to optimize compliance

The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU 2018-12), Targeted Improvements to Long-Duration Contracts, or LDTI, prescribes significant changes to the US GAAP accounting model for certain long-duration insurance contracts. The ASU amends insurers’ measurement, presentation, and disclosures for long-duration contracts. Implementation of the standard will require insurers to make fundamental changes along their end-to-end processes, from data origination through reporting.

This article covers four guiding principles insurers seeking to accelerate or kick off their LDTI implementation plans can explore to position themselves for success: reporting strategy, finance data model, chart of accounts, and accounting rules. LDTI will create meaningful changes across insurers’ entire financial reporting process. Carefully assessing these impacts can help insurers better understand the challenges, pain points, and risks the standard presents, informing strategic investments that can alleviate pressure on key areas of the reporting process. In this manner, companies can shift their implementation from a compliance-focused effort to a value-added delivery.

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How 2025 adopters can capitalize on the FASB’s extended LDTI timing

The Financial Accounting Standards Board (FASB) extended the effective date for Accounting Standard Update No. 2018-12 to December 15, 2025, for non-SEC filers and small reporting companies. Considering the enhanced requirements, complexity involved in implementation, and coordination required across various aspects of each organization, 2025 adopters may want to consider starting on their implementation journey sooner rather than later to truly take advantage of this transformational opportunity, as well as the additional implementation time provided by the FASB.

Long-duration targeted improvements (LDTI) provides an opportunity to revisit, enhance, and reshape your organization. In this article, we explore several factors that could influence your company’s potential LDTI implementation journey, including leveraging LDTI as a catalyst for change. In addition, we’ll discuss how to assess your current state against the necessary areas for LDTI compliance to help you identify gaps, define future goals, and understand what success could look like when LDTI is effective.

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Long-Duration Targeted Improvements (LDTI) readiness

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2018-12 (ASU 2018-12 or LDTI), which amended the accounting model under US GAAP for certain long-duration insurance contracts. The FASB’s intent was for the ASU’s targeted improvements to provide more timely and useful information to financial statement users in addition to simplifying how insurers apply certain aspects of the accounting model for certain long-duration contracts.

Since the standard was first announced, the FASB subsequently revised the transition dates twice, with the most recent revision being approved in November 2020, which extends the effective date for SEC filers to January 1, 2023.

Based on a survey conducted by Deloitte in June 2020, companies are not far behind in their implementation plans. This article explores how the industry has progressed with implementing the new accounting standard, where companies may shift their focus given the additional time, and some of the challenges faced on the implementation journey.

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Part 1: Transforming controls under long-duration targeted improvements

On January 1, 2023, the Financial Accounting Standards Board Accounting Standards update No. 2018-12 will go into effect for public filers. This new standard will change the foundation of accounting for many long-duration insurance products, requiring a fundamental rewriting of accounting policies, development of new actuarial methods, and redesign of the process supporting the changes.

In this first part in our series focused on controls, we cover the required full refresh and modernization needs to accommodate these foundational changes under long-duration targeted improvements (LDTI). Many companies are planning process upgrades across the actuarial and accounting operations as part of the LDTI implementation, and this is an opportunity to design controls that are fully integrated into a procedure. Explore three key areas of focus companies can consider to successfully modernize the financial control environment.

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Think beyond compliance: Source of earnings in the LDTI world

Accounting Standards Update (ASU) 2018-12, also known as Targeted Improvements for Long-Duration Contracts (LDTI), amends existing accounting requirements for certain long-duration contracts and represents the most significant change to the US insurance accounting framework in decades. To achieve effective compliance when implementing LDTI, companies affected by ASU 2018-12 have been making considerable investments in data capabilities and technology.

As companies commit resources to their LDTI implementations, they face the challenge of explaining financial results to stakeholders. Moreover, many insurers are seeking other value-added insights that can be extracted from the LDTI solutions to form management insights and inform business decisions. One way for companies to clearly articulate the earnings results that arise under LDTI is through a source of earnings (SOE) analysis. In this article, we explore the key steps that ensure a successful deployment of the SOE.

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Implementing an LDTI compliance solution that drives long-term business value

As life and annuity (L&A) insurance companies develop data and reporting solutions to implement Accounting Standards Update (ASU) 2018-12, Long Duration Targeted Improvements (LDTI), they should consider an approach that enables LDTI compliance, supports future business data needs, and drives long-term business value.In this article, we explore how LDTI implementation presents an opportunity for L&A insurance companies to establish the necessary systems architecture to deliver on the most urgent LDTI business data requirements and to build for the future. A “smart compliance” approach that builds on an insurance company’s prior technology investments can help meet immediate LDTI requirements and establish a scalable data platform that provides future business value.

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Tackling the ASU 2018-12 long-duration targeted improvements new disclosures requirements

Accounting Standards Update 2018-12 (ASU 2018-12) targets improvements to US GAAP for long-duration contracts and requires insurers to add disclosures in annual and interim reporting periods. This article—the seventh in our series on the Financial Accounting Standards Board (FASB) ASU 2018-12 update—focuses on one of the complex disclosure requirements, the future policy benefits rollforward.

This long-needed disclosure will affect requirements for enterprise process, governance, people, technology, and data. For many insurers, ASU 2018-12 will present a real reporting challenge that calls for a substantial redesign of current reporting processes and the collection of data for transition and future reporting. To comply, insurers will need to evaluate numerous accounting policies, valuation procedures, and data management structure.

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Discount rate policies and development methods for long-duration targeted improvements

One of the key changes defined in FASB ASU 2018-12 focuses on discount rates. The use of upper-medium grade low credit risk fixed-income instrument yields is required by the long-duration targeted improvements (LDTI) standard. The discount rate must be updated each reporting period with changes impacting accumulated other comprehensive income.

In this article, you’ll learn about technical considerations when electing a discount rate policy and development method—as well as the impact of implementing the new guidance on processes, systems, and data.

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Leveraging LDTI regulatory intersections with IFRS 17, PBR, and CECL

As insurers upgrade their compliance processes to meet the new FASB ASU 2018-12 requirements, the implications of more regulatory changes are compounded for those with multi-national jurisdictions. Process implementation to comply to newly issued International Financial Reporting Standard (IFRS) insurance requirements are also in full swing, as well as for US entities adopting the FASB’s current expected credit loss (CECL) model and statutory (Stat) modifications toward principle-based reserving.

This article examines the regulatory intersections of LDTI, IFRS 17, PBR, and CECL and explores opportunities to leverage synergies to enhance efficiencies, increase cost savings, and reduce resource requirements.

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FASB long-duration targeted improvements

ASU 2018-12 guidance provides two transition methods for accurately measuring the impact of the FASB Long-Duration Targeted Improvements (LDTI) on existing business: Full retrospective or modified retrospective transition. This retrospective approach allows for accurate and precise measurement to establish the opening balance sheet at the transition date. The carryover approach (modified retrospective) provides guidance on how to pivot balances as of the election date (January 2019) and how to record impacts that occur based on the new guidance.

This paper outlines considerations to help insurers determine which of the two transition methods best suits their needs.

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Targeted improvements to the accounting for long-duration contracts

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update 2018-12 (the “ASU”), amending the accounting model under USGAAP for certain long-duration insurance contracts and requiring insurers to provide additional disclosures in annual and interim reporting periods. ASU 2018-12 introduces new reporting complexities and will require more integration of finance and actuarial teams across processes and systems.

This article will help finance and actuarial teams to better understand implementation of ASU 2018-12.

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Modernizing data and analytics capabilities for long-duration contracts success

For many US insurers, ASU 2018-12 is just one of several data-intensive accounting changes that must be addressed in a relatively short timeframe. The data, technology, and operational implications of ASU 2018-12 are significant: Insurers will need to be much more agile in how data is managed, analyzed, and reported, at the most granular level and in aggregate.

Explore this report on the new standard to learn more about the implications—and opportunities—compliance will present around data, technology, and operations.

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The road ahead on targeted improvements to the accounting for long-duration contracts

As Deloitte has engaged with insurers preparing to implement ASU 2018-12, we have seen firsthand the early successes and challenges of the new insurance accounting standards. Implementing the standard successfully will require multifaceted end-to-end process transformation—data origination through reporting—requiring major efforts from accounting and finance, actuarial, technology, and project management departments, and a critical role for product development and pricing, forecasting, risk management, tax, legal, internal audit, investments, financial planning, procurement, human resources, and investor relations.

This article offers observations and early lessons learned and discusses steps insurers should consider on the path to a successful ASU 2018-12 implementation.

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The publication of ASU 2018-12 defines new regulatory requirements for certain long duration insurance products, otherwise known as the Long Duration Targeted Improvements (LDTI). Despite being finalized, the new requirements are subject to continuous interpretation from the insurance industry and practitioners. Deloitte is closely involved in these discussions and shares its Point of View (POV) to support the application of LDTI. Please note that the Deloitte POV’s are written at a point in time and should not be interpreted as stand-alone guidance without taking into account ongoing industry views and evolving positions from both FASB and the Insurance Experts Panel (IEP). Until the industry is nearing the effective date on 1 January 2022, industry views and interpretations such as the Deloitte POV’s are subject to change.

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