Long-Duration Targeted Improvements: The Future of Financial Reporting

Introduction 

In 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, “Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts” (LDTI). This ASU was the culmination of a multi-year project to improve the accounting and financial reporting for long-duration insurance contracts, such as life insurance and annuities. Check out what lies ahead on your LTDI journey? 

LDTI became effective for calendar-year end SEC filers other than smaller reporting companies (SRCs) on January 1, 2023, and will become effective for all other calendar-year end entities on January 1, 2025. 

What is LDTI? 

Long-Duration Targeted Improvements (LDTI) is a new accounting standard issued by the Financial Accounting Standards Board (FASB) in 2018. LDTI makes a number of significant changes to the accounting and financial reporting for long-duration insurance contracts, such as life insurance and annuities. 

LDTI makes a number of significant changes to the accounting for long-duration insurance contracts, including: 

A change in the unit of account from statutory accounting principles (SAP) to fair value 

A change in the discount rate from a market-based rate to a contract-specific rate 

A change in the way that assumptions are unlocked 

A new market risk benefit 

A new deferred acquisition cost (DAC) amortization method 

Enhanced disclosures 

The benefits of LDTI 

LDTI is expected to provide a number of benefits to financial statement users, including: 

More accurate and relevant information: LDTI will require insurance companies to report their long-duration contracts on a fair value basis, using contract-specific discount rates. This will provide financial statement users with more accurate and relevant information about the financial position and performance of insurance companies, as it will reflect the current market value of their liabilities and assets. This is particularly important for long-duration contracts, which can have significant value and risks that may not be fully captured by traditional accounting methods. 

Improved transparency: LDTI will also require insurance companies to disclose more information about their long-duration contracts, such as the assumptions used to measure their fair value and the risks associated with these contracts. This will improve the transparency of financial reporting for insurance companies, making it easier for financial statement users to understand the risks and opportunities facing these companies. 

Increased comparability: LDTI will also require all insurance companies to use the same accounting methods for long-duration contracts. This will increase the comparability of financial reporting for insurance companies, making it easier for financial statement users to compare the financial performance of different insurance companies. 

Enhanced decision-making: By providing more accurate, relevant, transparent, and comparable information, LDTI is expected to enhance the decision-making of financial statement users. For example, investors will be better able to assess the risk and return of investing in insurance companies, and creditors will be better able to assess the creditworthiness of insurance companies. 

The implementation of LDTI 

The implementation of LDTI is a complex and challenging process. Insurance companies need to make significant changes to their accounting systems and processes in order to comply with the new requirements. These changes can be costly and time-consuming. 

Many insurance companies have already begun the process of implementing LDTI. However, it is important to note that LDTI is a long-term project, and it will take several years for insurance companies to fully implement all of the new requirements. 

The implementation of LDTI is also likely to have some implications for consumers. For example, insurance companies may need to increase premiums in order to cover the costs of implementing LDTI. Additionally, LDTI may make it more difficult for consumers to compare insurance products from different companies. 

Overall, LDTI is a significant change to the accounting and financial reporting for long-duration insurance contracts. It is expected to provide financial statement users with more accurate, relevant, transparent, and comparable information. However, the implementation of LDTI is a complex and challenging process that will take several years to complete. 

The future of financial reporting 

LDTI is a significant step forward in the financial reporting of long-duration insurance contracts. It is expected to provide financial statement users with more accurate, relevant, transparent, and comparable information. 

LDTI is also a sign of things to come in the future of financial reporting. Regulators and accounting standard setters are increasingly focused on providing financial statement users with information that is more relevant to their decision-making needs. This trend is likely to continue in the years to come, as regulators and accounting standard setters work to improve the financial reporting of all types of companies. 

Conclusion 

LDTI is a significant change to the accounting and financial reporting for long-duration insurance contracts. It is expected to provide financial statement users with more accurate, relevant, transparent, and comparable information. 

 The implementation of LDTI is a complex and challenging process. However, insurance companies are already making significant progress 

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