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IASB Draft Puts Spotlight On Fair Value Accounting

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U.S. insurers and industry groups are just starting to decide how to respond to a major insurance contracts accounting paper.

Insurance Working Group members at the International Accounting Standards Board, London, put out the paper earlier this month, to sketch out preliminary IASB views about ways to improve the current IASB insurance accounting standards.

In the United States, the Financial Accounting Standards Board, Norwalk, Conn., is reviewing its own insurance standards, and FASB could end up participating in a joint project with the IASB.

IASB working group members have tried to incorporate a fair value approach to recognizing liabilities in their paper.

The authors of the paper talk about 3 major standards building blocks:

- Explicit, unbiased, market-consistent, probability-weighted and current estimates of contractual cash flows.

- Current market discount rates that adjust the estimated future cash flows for the time value of money.

- An explicit and unbiased estimate of the “risk margin” — the margin that market participants require for bearing risk — and the “service margin” — the margin that market participants require for providing other services.

Creating new standards based on those building blocks should lead to increased consistency with other international financial reporting standards that require use of current estimates of future cash flows in measurement of liabilities, the working group members write.

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Updating the standards also should lead to clearer reporting of economic mismatches between insurance liabilities and related assets, and a reduction in accounting mismatches, the working group members write.

Working group members predict the changes also would increase consistency with observable current market prices, to the extent that current prices are available.

Comments on the paper are due in November.

If FASB incorporates the IASB working group paper principles in its agenda, then that will be a “revolution for insurance accounting,” says Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York.

A shift to a fair value approach could affect accounting measurement, deferred acquisition costs, classification of assets and liabilities, and treatment of gains and losses, Barnert says.

When an insurer shifts to an asset-liability model, then it is important that the profit and loss statement be “realistic and not unnecessarily volatile,” Barnert contends.

Looking at liabilities without also looking at assets will create volatility, Barnert predicts.

The IASB working group paper examines whether insurers should be allowed to show future dividend payments for participating contracts when determining liabilities. Allowing such information to be shown is important because this is information that investors want to know about, Barnert says.

The IASB has posted a copy of the working group paper on the Web