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July 13, 2011updated 13 Apr 2017 8:48am

US insurers fearing worst over accounting standards confusion

The US-based Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (ISAB) have been working toward a unified standard for several months now, but leaders of both bodies recently said they have pushed back work on the handful of "priority" convergence projects they had committed to complete this year.

By LII editorial

The on-again, off-again discussion of a single global accounting standard has US insurers on edge, but the long-term gain is likely to outweigh any short-term pain.

The US-based Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (ISAB) have been working toward a unified standard for several months now, but leaders of both bodies recently said they have pushed back work on the handful of “priority” convergence projects they had committed to complete this year.

Whether or not a unified standard emerges is of huge importance to insurers. The move to a single standard could cost US life insurers more than $1bn to implement, according to the American Council of Life Insurers (ACLI).

FASB chairwoman Leslie Seidman and IASB chair Sir David Tweedie said in a joint announcement that they would “extend by a few months” their work on the revenue recognition, leasing, financial instruments and insurance projects, describing their earlier June 2011 date by which they had originally planned to complete their major convergence projects as merely a “target” and not a firm “deadline.”

 

Huge implications

The implications for insurers are huge, stresses the ACLI, and include the costs of reconfiguring the chart of accounts, the closing process, retraining staff and purchasing new accounting systems.

Progress to date by the two bodies has been impressive, underscoring the sense of urgency being placed on the working groups by the Group of 20 (G20), which has called for a single accounting standard worldwide.

Pull quote by Leslie Seidman, Financial Accounting Standards BoardAt the G20 meeting in Pittsburgh in 2009, the international accounting bodies were charged with devising a single set of high quality, global accounting standards by June 2011.

That deadline has come and gone, and moreover, there is still no decision by the Securities and Exchange Commission as to whether the US will give up Generally Accepted Accounting Principles, known as GAAP, and instead use International Financial Reporting Standards (IFRS), which are applied by over 100 countries.

IASB and FASB have completed work on five major accounting projects, including a post-employment benefits project, since November 2010, and they soon will be issuing fair value measurement requirements.

Insurance industry attention is sure to grow even stronger as the boards now are focusing on the insurance standard project, a financial instruments accounting project, and a leasing and revenue recognition project.

“We have also clarified our plan to continue to engage stakeholders in the remaining steps of the process, and give them an opportunity to review the draft standards before they are finalised,” Seidman said.

Earlier this year, US insurers had suggested that the IASB and FASB insurance standards completion schedule had given them too little time to get a fair hearing for their views on standards proposals. But they recently relented and the discussions resumed.

Another key accounting focus in 2011 will be the potential overhaul of US governmental pension accounting, with a Governmental Accounting Standards Board (GASB) redraft on final standards expected in the second half of 2011.

 

Heart of the issue

The proposed pension accounting changes by the GASB will likely lower the reported funded status of most pension plans, and the debate on the state of public pension plans will continue to be intense if the current deficit and funding issues persists.

The heart of the issue is whether a global standard can be crafted that acknowledges the reserving and discounting practices of different types of insurance coverage, particularly property/casualty and life. IASB’s exposure draft insists on discounting probability-weighted cash flows.

The discounting of probability-weighted cash flows that may be appropriate for life contracts, but are not useful to users of financial statements who are assessing short-duration property/casualty contracts, defined under US standards as one year or less in duration.

 

Higher liability volatility

For life insurers, the most drastic change would be that liabilities will have to be measured reflective of current assumptions.

Under the current US model, generally accepted accounting principles, the standards allowed use of a locked-in historical rate that was in existence at the time when contracts were written.

The standard in future will require a more current estimate of obligations.

That will introduce a real element of volatility to measurement amounts for liabilities in the US, because accountants will have to use the current interest rate in their measurements.

Another sticking point is the IASB’s preference for a unified model for all insurance contracts. Conversely, FASB contends that due to their shorter durations, non-life contracts are different and therefore require a different accounting approach.

Add in the pressure felt by European insurers to get a unified risk-margin standard in place ahead of the adoption of European Union’s pending Solvency II standards, and the situation becomes even more complex.

There is little stopping the momentum behind a unified standard, as driven as it is by forces far beyond any one industry, let alone insurance.

There are several drivers in the push to a single standard, none stronger than the global nature of business and the need for apples-to-apples comparisons.

Standard setters are striving to more accurately assess risk – a key task for the life industry as it prepares for the new standard. ACLI projects that risk recalibration under a unified global standard will account for the bulk of the costs associated with compliance.

While the economic case for the switch may not be strong, failure to act carries substantial political risks for the US. It could also imperil the push for a global reporting regime and weaken efforts to reform other areas of global financial regulation.

That alone is sure to propel this global effort forward in the coming months.

Charles Davis

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