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May 12, 2011 at 08:00 PM
The Financial Accounting Standards Board (FASB) has issued the final version of a document that could affect how insurers report on the performance of their investment portfolios.
FASB, Norwalk, Conn., worked on its fair value measurement project – an update of Topic 820 in the FASB Accounting Standards Codification — along with the International Accounting Standards Board (IASB), London.
FASB manages the U.S. Generally Accepted Accounting Standards (GAAP) accounting standards system.
IASB, which manages accounting standards outside the United States, has published a comparable batch of fair value guidance – International Financial Reporting Standard (IFRS) 13 Fair 
Value Measurement.
The Topic 820 update and the IFRS 13 guidance should harmonize the U.S. GAAP rules and the IASB rules, FASB and IASB officials say.
“The harmonisation of fair value measurement and disclosure requirements internationally also forms an important element of the boards’ response to the global financial crisis,” FASB and IASB officials say.
Debate about the use of fair value accounting methods became heated in late 2008 and in 2009, after the credit market freeze paralyzed the markets for some types of financial instruments.
FASB and IASB have been working on the fair value project for about 5 years.
Some accounting purists argued that banks, insurance companies and other companies should use the true market values when reporting on their asset and liabilities, even if that would mean setting the values at zero; others argued that a pure fair value approach would force companies to report unrealistically low values as a result of temporary problems in the financial markets. In some cases, the critics said, reporting low asset values caused by short-term market problems could lead to long-term damage to a company’s operations.
U.S. insurance groups such as the American Council of Life Insurers (ACLI), Washington, and the Group of North American Insurance Enterprises (GNAIE), New York, told FASB and IASB during the public comment period for the Topic 820 update draft that they were worried about the cost and complexity of implementing some proposed provisions, such as a requirement for formal measurement uncertainty analysis.
TOPIC 820: THE NARRATIVE DESCRIPTION REQUIREMENT
The revised version of Topic 820 defines “fair value” as being a “market-based measurement of a value.”
“For some assets and liabilities, observable market transactions or market information might be available,” FASB says. “For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same–to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between
market participants at the measurement date under current market conditions (that is, an … exit price … at the measurement date from the perspective of a market participant that holds the asset or owes the liability).”
