The Financial Accounting Standards Board is looking for the market’s views on whether it should declare open season on accounting rules related to insurance for policyholders and issuers alike.
FASB has called for comment on how much the U.S. market likes what the International Accounting Standards Board has developed so far in its effort to rewrite insurance accounting rules within International Financial Reporting Standards. In fact, the preliminary IASB document stating its intended direction in insurance accounting rules is the lion’s share of FASB’s 267-page invitation to comment.
Dennis Beresford, accounting professor at the University of Georgia and a former chairman of FASB, says the Board may be considering work on insurance accounting rules not only to converge U.S. Generally Accepted Accounting Principles with international rules, but also to leverage the work IASB has already done.
Beresford
“A lot of people have complained about insurance accounting, although they’ve not been very specific about it,” Beresford says. “We’ve had the same model for quite a long time now. FASB seems to believe the fair value approach will fix all ills. I suspect this is very early stage, and I suspect it will get quite a bit of opposition from insurance companies. But it’s way too early to get too concerned about it.”
FASB’s call for comments asks whether it should open a project on insurance accounting, whether such a project should be undertaken jointly with the IASB or separately, and whether it should follow the lead established by the IASB. FASB says the proposed project would define the term “insurance contract” in economic terms, using the existing IASB definition. IASB says an insurance contract is “a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”
FASB says that definition would encompass contracts that
are not seen as insurance contracts under current GAAP, including some financial guarantees issued by banks or other noninsurance entities, such as certain letters of credit. It might also include some performance bonds, roadside assistance programs, warranties, and catastrophe bonds issued by noninsurance entities, according to FASB.
Miller
Paul Miller, an accounting professor at the University of Colorado, says existing standards are “archaic and anachronistic,” providing little useful information to users of financial statements. “In general, they were put together with a lick and a promise, one small project at a time, without a careful overall analysis that defined the issues, weighed the alternatives, and then selected the best among them,” he says.
According to FASB’s analysis, existing rules regarding accounting for insurance are scattered among at least seven different accounting standards and an assortment of interpretations, technical bulletins, staff positions, guidance from the Securities and Exchange Commission, and pronouncements by FASB’s Emerging Issues Task Force and by the American Institute of Certified Public Accountants.
Insurance accounting involves complexities, Miller says, because it involves so many unknowns. “For policyholders, issues include the existence and amount of an asset and the existence and amount of future cash outflows for uninsured losses, either from no policy or losses beyond the policy limit,” he says. “For insurers, there are issues concerning the amount of income, the sources of income, the amount of assets, and the potential cash outflows from covering other people’s losses.”
Response to both the IASB preliminary views and the FASB invitation to comment are due Nov. 16.
IAASB Issues Exposure Drafts on Auditing Standards
As part of its ongoing effort to enhance the quality and consistency of audits globally, the International Auditing and Assurance Standards Board has published nine new exposure drafts of auditing standards reflecting its new approach in the use of language to related critical auditing issues.
The redrafted standards focus on quality control for audits of financial statements, the internal auditor’s report, modifications to the opinion expressed in an internal audit report, and other external audit issues.
Kellas
“Together, these standards deal with important quality control considerations at both the firm and engagement levels. The standards are closely linked, and therefore, implementing clarity revisions at the same time makes sense to ensure consistency between them,” John Kellas, IAASB’s chairman, said in a statement.
The new drafts are written to comply with IAASB’s new drafting conventions to include the specification of an objective within each standard and separate sections for requirements and application and other material. The IAASB has now approved five final standards drafted according to the new conventions and 23 exposure drafts of ISAs. The Board expects to issue another seven exposure drafts this year and to complete all 35 standards as final standards by the end of 2008.
IAASB is an arm of the International Federation of Accountants.
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