Accounting for Accounting Changes

As regulators work to craft develop a single, converged standard for insurance contracts, a new report from PricewaterhouseCoopers takes measure of their progress.

Both the Norwalk, Conn.-based Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (IASB) have issued exposure drafts that shed light on the direction the boards envision. While largely similar, there are areas of divergence, PricewaterhouseCoopers notes.

“Both the FASB and IASB proposals would require insurance contracts to be accounted for using a current measurement model that reflects the present value of expected cash flows to fulfill the obligation, where estimates are remeasured at each reporting period,” the report notes. “The IASB proposal includes an explicit risk adjustment for the uncertainty about the amount and timing of future cash flows that would be separately estimated and remeasured each period. The FASB proposal does not. Both proposals would defer and amortize any excess of expected cash inflows over outflows existing at inception in order to eliminate any initial profit. Conversely, any losses would be recognized immediately.”

The effort to fashion insurance-specific accounting rules occurs amid a larger effort to merge U.S. and world accounting standards. Not surprisingly, the insurance industry is watching this development with a keen eye. When the FASB issued its exposure draft in August, the Group of North American Insurance Enterprises (GNAIE) raised concerns over valuation methodologies.

"To increase the decision usefulness of insurance company financial reports, we believe insurance companies should have the ability to align the measurement, classification and reporting of financial assets and liabilities with both the business strategy for the financial instruments and their business model," GNAIE Executive Chair Jerry de St. Paer wrote in a letter to FASB Technical Director Russell Golden.