FASB amends long-duration contracts transition guidance

Key Impacts:

The Board amended the transition guidance provisions of its ASU on targeted improvements to the accounting for long-duration contracts. The amendments state that:

• An entity may make an accounting policy election to exclude certain contracts or legal entities when they have been sold and derecognized before the effective date and the entity has no significant continuing involvement with them.
• An entity is prohibited from applying the accounting policy election when it holds an interest that continues to provide significant influence over the derecognized contracts considering the guidance in paragraphs 323-10-15-6 through 15-11, including equity ownership interests that are not within the scope of that guidance or other arrangements that allow the entity significant participation in the derecognized contracts.
• Contracts that are terminated through recaptures are not in the scope of the amendment.
• An entity may apply the accounting policy election on a transaction-by-transaction basis to all contracts within a sale or disposal transaction that meet the accounting policy scope.
• If the accounting policy election is made, an entity discloses a qualitative description of each sale or disposal transaction to which the accounting policy election is applied.

The amendments include examples of forms of significant continuing involvement that (1) prohibit an insurance entity from applying the accounting policy election, and (2) allow an insurance entity to apply the accounting policy election.

The amendment is effective consistent with the effective dates of the amendments in ASU 2020-11.

The Board made its decision based on outreach from insurance companies. They indicated that applying the guidance to contracts or legal entities sold and derecognized before the effective date could create operational challenges and not provide decision-useful information to financial statement users.