IFRS 17 vs LDTI (ASC 944): Key Differences

IFRS 17 and LDTI both moved insurance accounting away from locked-in assumptions, and both force the liability to respond to current discount rates. They differ in what happens to profit, which is where most of the reconciling items come from.

Sources: IFRS 17, ASU 2018-12 and ASU 2020-11. The sections below take each row in turn. For the service that applies the IFRS side, see IFRS 17 implementation and reporting support.

IFRS 17 applies to insurance contracts an entity issues, reinsurance contracts it holds and investment contracts with discretionary participation features. The IFRS Foundation page says the standard was issued in May 2017, applies to annual reporting periods beginning on or after 1 January 2023, replaced IFRS 4, and was amended in June 2020. Early application required IFRS 9.

LDTI is ASU 2018-12, issued August 15, 2018. It applies to all insurance entities that issue long-duration contracts, and not to holders of those contracts or to noninsurance entities. Two deferrals followed: ASU 2019-09 in November 2019 and ASU 2020-11 in November 2020. The final dates are fiscal years beginning after December 15, 2022 for SEC filers that aren't smaller reporting companies, and after December 15, 2024 for all other entities, with interim periods within fiscal years beginning after December 15, 2025.

That gives a private US life insurer with a calendar year an LDTI effective date of January 1, 2025, whether or not its IFRS parent has run IFRS 17 since January 1, 2023. The two clocks started at different times, which is why many groups carried an IFRS 17 model for two years before the US GAAP twin arrived.

FASB's own example shows the transition-date logic: a large calendar-year public insurer records its transition adjustment as of January 1, 2021 in its 2023 statements unless it adopts early. Under LDTI the actuarial standard for US GAAP work on long-duration products is ASOP No. 10, effective May 1, 2023, per the Actuarial Standards Board list.

IFRS 17 measures a group of contracts as a risk-adjusted present value of future cash flows plus a contractual service margin, which represents unearned profit (paragraphs 32 to 38). The risk adjustment compensates for non-financial risk (paragraph 37). The margin changes through accretion at the locked-in rate, through changes in future-service cash flows and through a release based on coverage units (paragraphs 44, B96 and B119).

LDTI keeps the old family of a liability for future policy benefits built on net premiums, the portion of gross premium required to provide for benefits and expenses. The liability is the present value of future benefits and expenses less the present value of future net premiums (944-40-30-7). ASU 2018-12 removes the provision for the risk of adverse deviation and premium deficiency testing. It requires the cash flow assumptions to be reviewed, and updated if changed, at least annually. A revised net premium ratio can't exceed 100 percent, and any excess shows up as an immediate charge (944-40-30-7A).

The same favorable update therefore lands in different places. Under IFRS 17, a favorable change in future-service cash flows adds to the margin and is released over the remaining coverage. Under LDTI, the change in the liability from updating cash flow assumptions is recognized in net income. Both lock in the contract-issue discount rate for interest accretion: the LDTI text discounts the updated liability at the original, contract issuance rate (944-40-35-6A).

Grouping adds a second difference. IFRS 17 forms annual cohorts and profitability groups (paragraphs 16 and 22). LDTI forbids grouping contracts from different issue years and uses quarterly or annual groups (944-40-30-7), with no profitability split.

IFRS 17 asks for discount rates that reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the contracts, are consistent with observable market prices for comparable instruments, and exclude factors that affect those prices but not the contract's cash flows (paragraph 36). The rates for measuring fulfilment cash flows are current (paragraph B72(a)), and the rate for accreting the margin on contracts without direct participation features is the rate at initial recognition (paragraph B72(b)).

LDTI replaces the old expected-yield-on-invested-assets rate, which wasn't observable, with the yield on an upper-medium grade (low credit risk) fixed-income instrument that maximizes the use of observable market inputs. The rate is updated for annual and interim reporting periods as of the reporting date, and the change in the liability from updating it goes to OCI (ASU 2018-12 summary; 944-40-35-5).

The policy choice is what makes the IFRS 17 and US GAAP OCI balances differ in size even when rates are the same. The group's accounting policy memo says which way the parent chose.

LDTI simplifies amortization of deferred acquisition costs. ASU 2018-12 requires DAC and other balances amortized in proportion to premiums, gross profits or gross margins to be amortized on a constant level basis over the expected term of the related contracts. DAC is written off for unexpected contract terminations and isn't subject to an impairment test.

IFRS 17 doesn't have DAC. Insurance acquisition cash flows are allocated to groups of contracts using a systematic and rational method (paragraph 28A). Those paid before the group is recognized sit as an asset for each related group (paragraph 28B), and the amortization of insurance acquisition cash flows is shown among insurance service expenses in the reconciliations (paragraph 103(b)(ii)). Under the premium allocation approach, an insurer may expense them as incurred if each contract's coverage period at initial recognition is no more than one year (paragraph 59(a)).

The practical difference for a dual reporter is the pattern, not the total. Over a contract's life both recover the same acquisition cash. LDTI recovers it evenly over the expected term. IFRS 17 recovers it through the measurement of the group, so a change in coverage-unit pattern or in the expected term moves it differently. We keep a single acquisition-cost table by contract and apply each rule to it, so the reconciling item is a calculation, not an estimate.

LDTI introduces a new category. A market risk benefit is a contract or contract feature in a long-duration contract that both protects the contract holder from other-than-nominal capital market risk and exposes the insurer to other-than-nominal capital market risk. The insurer measures all such benefits associated with deposit or account balance contracts at fair value. The portion of any change in fair value attributable to instrument-specific credit risk is recognized in OCI (ASU 2018-12).

IFRS 17 has no such category. Contracts whose features link payments to underlying items fall under the direct participation rules if the contract states that the policyholder participates in a share of a clearly identified pool of underlying items, the insurer expects to pay an amount equal to a substantial share of the fair value returns on those items, and it expects a substantial proportion of any change in the amounts to vary with the underlying items (paragraph B101). For those contracts the margin absorbs the change in the insurer's share of the fair value of the underlying items (paragraph 45(b)), which is the variable fee approach.

The outcome is that the same variable annuity can show a fair-value volatility line in net income under LDTI and a margin adjustment under IFRS 17. A good data file therefore stores the benefit, the underlying items and the pool for each contract, so either model can be rerun.

IFRS 17 changes the income statement. The insurer presents insurance revenue from groups of contracts issued (paragraph 83), excluding investment components (paragraph 85), insurance service expenses, and insurance finance income or expenses (paragraph 87). It presents the carrying amounts of portfolios of issued contracts and of reinsurance contracts held, assets and liabilities separately (paragraph 78). The notes reconcile opening and closing balances (paragraphs 100 to 103), disclose the significant judgments (paragraph 117) and the confidence level of the risk adjustment (paragraph 119), and disclose the yield curves used to discount (paragraph 120).

LDTI keeps the existing income statement shape and changes the notes. ASU 2018-12 requires disaggregated rollforwards from beginning to ending balance of the liability for future policy benefits, policyholder account balances, market risk benefits, separate account liabilities and deferred acquisition costs, plus information about significant inputs, judgments, assumptions and methods and the effect of changes in them. Rollforwards of the liability are presented gross of any related reinsurance recoverable.

The result for a dual reporter is two note sets built from two sets of rollforwards. The reconciling table between them is the one a group auditor tends to ask for first, and it needs to explain differences in opening balances, not only in the year's movement.

IFRS 17 modifies its own requirements for reinsurance contracts held, in paragraphs 61 to 70A. An insurer divides portfolios of reinsurance held the same way, except that groups are defined by whether there is a net gain on initial recognition instead of by onerous contracts (paragraph 61). Reinsurance contracts held can't be onerous (paragraph 68), the margin on a group follows paragraph 66 instead of paragraph 44, and the premium allocation approach can be adapted for them (paragraph 69). Cash flows under reinsurance held are kept out of the cash flows for the contracts they cover, because reinsurance held is recognized, measured and presented separately (paragraph B66(b)). The statement of financial position shows the two apart (paragraph 78).

LDTI changes less here. Its disclosure rollforwards of the liability for future policy benefits, policyholder account balances and market risk benefits are presented gross of any related reinsurance recoverable, which keeps the ceded effect on a separate line (ASU 2018-12).

The consequence is a different shape of result for the same treaty. A treaty that gives a net gain at inception can carry a margin on the reinsurance asset under IFRS 17. LDTI has no margin to hold it. Treaty-level data therefore needs to be stored by treaty, with the contracts it covers, so both treatments can be rebuilt.

A US insurer with an IFRS parent runs the grouping, the discounting, the profit pattern, the acquisition cost schedule, the market-linked feature treatment and the note tables twice, once for each model, from one contract file. Six checks make the second run credible.

• Each contract carries issue date, portfolio, profitability at inception, coverage units and locked-in rate.
• Both discount curves are stored with their dates and sources.
• The acquisition cost table shows the DAC and IFRS 17 schedules side by side.
• Reinsurance data is stored by treaty, so both treatments can be rebuilt.
• A bridge from US GAAP to IFRS 17 lists each reconciling item with its cause, per period.
• The signing actuary's report names the standards of practice applied.

Finbryn prepares the data checks, calculations and bridge. This guide is general information only. Actuarial calculations behind either model are reviewed and signed by the insurer's own actuary or another credentialed actuary it engages, named in the engagement letter. We don't describe the output as compliant with either standard; your auditors and the group's auditor decide that. The related service pages are IFRS 17 implementation and reporting support and loss reserve studies. A US insurer also keeps statutory books, covered in statutory accounting vs GAAP for insurers. For the benefits twin of this comparison, see IAS 19 vs ASC 715.