Accounting Standards Update: 2/9/23

The Financial Accounting Standards Board (FASB) regularly issues Accounting Standards Updates (ASUs) to make changes to the FASB Codification, the primary source of Accounting Principles Generally Accepted in the United States (GAAP). Below are two ASUs that were recently issued, ASU 2022-05, Financial Services–Insurance (Topic 944): Transition for Sold Contracts and ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.

ASU 2022-05, Financial Services–Insurance (Topic 944): Transition for Sold Contracts

The FASB has issued ASU 2022-05, Financial Services–Insurance (Topic 944): Transition for Sold Contracts. This ASU is intended to reduce the burden related to the application of the amendments in ASU 2018-12, Financial Services–Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) to contracts that were derecognized because of sale or disposal before ASU 2018-12’s effective date.

Summary

ASU 2018-12 was issued by the FASB to make targeted improvements to the existing financial reporting requirements for long-duration contracts issued by an insurance entity. Stakeholders have expressed concerns about challenges in the initial application of the amendments in ASU 2018-12 to contracts that were derecognized because of sale or disposal of individual or a group of contracts or legal entities before the effective date of ASU 2018-12. The initial application of ASU 2018-12 would require insurance entities to reclassify a portion of the previously recognized gains or losses to the transition adjustment, though there would be no impact on the entities’ future cash flows. Therefore, stakeholders indicated the application of the LDTI amendments to contracts sold or disposed of prior to the effective date would not provide decision-useful information to users of the financial statements of insurance entities. However, it would increase implementation costs and complexity in its application.

Under ASU 2022-05 an insurance entity may make an accounting policy election to exclude contracts (including individual contracts, groups of contracts, or legal entities) derecognized due to a sale or disposal before the effective date of ASU 2018-12 if the entity has no significant continuing involvement with the derecognized contracts. The election is made on a transaction-by-transaction basis. The insurance entity must disclose a qualitative description of each sale or disposal transaction for which the election was applied.

Effective Date and Transition

The amendments are effective concurrently with ASU 2018-12, as amended. For public business entities that meet the definition of an SEC filer and are not smaller reporting companies, ASU 2022-05 is effective for fiscal years beginning after Dec. 15, 2022. For all other entities, the ASU is effective for fiscal years beginning after Dec. 15, 2024. The guidance may be adopted early if the entity adopts ASU 2018-12 for the corresponding period.

ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848

The FASB has issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time preparers of financial statements can utilize the reference rate reform relief guidance provided by ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.

Summary

ASU 2020-04 was issued by the FASB to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The relief in ASU 2020-04 was made temporary by including a sunset date of Dec. 15, 2022, based on expectations that the London Interbank Offered Rate (LIBOR) would cease being published Dec. 15, 2021. The UK Financial Conduct Authority has since announced an intended cessation date of certain tenors of LIBOR as of Jun. 30, 2023.

ASU 2022-06 applies to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. ASU 2022-06 extends the sunset date of the relief provided by ASC 848 to Dec. 31, 2024, to cover the time period through which a significant number of modifications are expected to take place due to reference rate reform. After Dec. 31, 2024, entities will no longer be permitted to apply the relief in ASC 848.

Effective Date and Transition

ASU 2022-06 was effective for all entities upon the issuance of the ASU.

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