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"It's An Accounting Revolution"

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Staffers at accounting standards groups are laying the groundwork for efforts to develop international standards for the measurement “bases,” or “attributes,” used in accounting.

The efforts of the staffers, at the Financial Accounting Standards Board, Norwalk, Conn., and the International Accounting Standards Board, London, are “just the beginning of major change,” says Alan Close, a member of the accounting policy committee at the American Council of Life Insurers, Washington. “It’s an accounting revolution.”

FASB and the IASB recently held a discussion in Norwalk to give members of the public a chance to tell the standards groups what they think about measurement bases in accounting.

Anthony Cope, an IASB board member, started the FASB/IASB discussion by saying that parties who had submitted written documents to the groups or would be speaking during the discussion would have a real chance to be heard.

“We have not deliberated any issues related to measurement yet,” Cope said, according to an audio recording of the discussion posted on the Web.

Much of the discussion focused on highly technical accounting issues, but the authors of background documents who prepared for the discussion point out in the documents that measurement is central to accounting, and that non-accountants might be surprised to know how underdeveloped the conceptual framework for thinking about measurements of key attributes really is.

“To say that we have a mixed attribute system is a massive understatement,” Cope said.

FASB and the IASB have started a “joint central framework” project in an effort to come up with a common language for discussing measurement bases, evaluating measurement bases and addressing practical issues involved with using what appear to be the highest-rated bases, organization staffers write in the background paper.

For life insurers, a key concern about the framework is fair value accounting, Close says.

Users of fair value accounting attempt to determine the value of an asset by estimating how much a free, knowledgeable, independent party would pay for the asset.

Insurers may prefer use of a mixed model for measuring value that could include amortized cost, historical cost and depreciated cost as well as fair value, rather than a pure fair value model, Close says.

No one knows exactly how a FASB/IASB fair value measurement system would affect insurers because the details of the system have not been finalized, Close says.

Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York, agrees that using fair value measurement may not necessarily work in all cases.

There are times when a company’s own information is unique enough so that entity specific values are warranted, Barnert says.

In related news, the IASB recently held a meeting in London that included a review of insurance contracts.

The discussion focused on whether contracts that give the holder a chance to participate in the performance of a block of business and collect a dividend or some other sort of bonus should be considered a liability.

GNAIE recently weighed in on the topic in a letter written with a European insurance group and several Japanese insurers.

A discretionary participation feature is a constructive obligation, and, “in our view, the obligating event is the commitment by the insurer to declare bonuses to policyholders at the stage of entering into the contract,” the signers of the letter state. “At this point, the company is committing itself to pay out the substantial majority of the available surplus based on the participation arrangements.

“While the contract often does not specify the exact timing or the amount of bonuses to be paid, the very clear expectation that the great majority of available surplus based on the participation arrangements will be paid to policyholders is established.”

If liabilities are not reported along with assets, insurers could report a huge gain at the issue of a contract, Barnert says.

“We would like to see a system without gain and loss at issue,” Barnert says.


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