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
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.”
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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.
At 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
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.
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
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
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.