AXIS™ US GAAP
AXIS Support For ASU 2018-12
On August 15, 2018, the Financial Accounting Standards Board (FASB) issued an Accounting Standards Update (ASU) that changes some of the established methodology and assumption setting for financial reporting under US GAAP for insurance companies that issue long-duration contracts, such as life insurance, disability income, long-term care, and annuities. Commonly referred to as Targeted Improvements for GAAP, this update followed ten years of deliberation and consultation, including an initial effort to converge with International Financial Reporting Standards (IFRSs), that was subsequently abandoned in favour of a more selective targeted improvements approach.
Highlights of the changes required under the ASU 2018-12 include:
- Current assumptions required for liability measurement. Assumptions used to measure the liability for traditional insurance contracts, which were previously determined at contract inception, and considered locked in, will now be reviewed—and, if there is a change, updated—at least annually, with the effect recorded in net income.
- A more prescribed approach to the discount rate for liability measurement. Previously companies established the discount rate for the calculation of liabilities based on the rates they expected to earn. The liability discount rate will now be a standardized, market-observable discount rate (upper-medium grade fixed-income instrument yield), with the effect of rate changes recorded in other comprehensive income.
- Greater consistency in measurement of market risk benefits among products. Market risk benefits are provisions in insurance contracts that protect against the impact of capital market losses. The two previous measurement models have been reduced to one measurement model (fair value), resulting in greater uniformity across similar market-based benefits and better alignment with the fair value measurement of derivatives used to hedge capital market risk.
- A simplified approach to amortization of deferred acquisition costs. Previous earnings-based amortization methods have been replaced with a more level constant rate amortization over the expected life of the contract. The deferred amortization cost balances will not be subject to testing for recoverability but will be held as long as the related contracts remain in force.
- Enhanced disclosures. New disclosures will be required to accompany financial statements. They include roll-forwards of liability balances that reveal the reasons for the change and information about significant assumptions and the effects of changes in those assumptions.
For most publicly reported insurance companies, the changes will be effective in 2021. For all other companies reporting on a calendar year basis, the changes will be effective in 2022. Early adoption is permitted.
Moody's has been monitoring the developments of the FASB review project since it started and established an internal working group to examine and recommend how the updated standards for reporting long duration contracts should be reflected by enhancements in the US GAAP functionality in AXIS.
This review has already resulted in an overall conceptual framework for the changes needed, which would include revisions to the AXIS interfaces in Cells and Subfunds, introduction of new objects, changes in US GAAP reporting lines and special reports, and modifications in the approach to the valuation calculation process to better reflect the concepts in the standard.
With the release of the final ASU in August, we are now able to move this whole project forward, including the finalization of our design plans and commencement of actual development work. We do not believe there was anything substantively different in the final ASU from our most recent assessments which is welcome news.
The project to enhance AXIS will take some time considering the number of component jobs and widespread impact of the changes. As with other major projects, we anticipate releasing new functionality incrementally over the next year or two, leading up to the expected effective date, with the goal of enabling early feedback of our clients and facilitating their exploration and adoption of the new features as early as possible.
We plan to communicate a more detailed vision of our plans within the next month or two, along with a high level roadmap, and we will follow up with more communication on a regular basis, using our website and other direct communication channels during the project.
Should you have any specific questions on Moody's plans to support the new US GAAP standards in the meantime, please contact us through our client support portal.