When is U.S. GAAP Going Away?
By Ralph Blanchard, CAS Vice President-International 

Currently, the accounting system known as U.S. Generally Accepted Accounting Principles (GAAP) must be used by all public companies based in the United States and is the main resource used to keep U.S. statutory accounting up-to-date. Many foreign insurers also use U.S. GAAP insurance accounting rules for their own financial statements under current international accounting rules, known as International Financial Reporting Standards (IFRS), and can continue to do so until the International Accounting Standards Board (IASB) finishes their insurance accounting project. But U.S. GAAP, in all likelihood, is going away. The question is not “if” it’s going away, but “when.”

Why should U.S. GAAP be phased out, and who is pushing for this? The main driver of the effort appears to be the U.S. Securities and Exchange Commission (SEC), with the support of the Financial Accounting Standards Board (FASB) chair, Bob Herz. Much of the rest of the world is moving to IFRS (including Canada, Europe, Japan, China, Australia, et al.), and many believe it is unrealistic for U.S. GAAP to remain the sole holdout. The handwriting is on the wall. But how should the U.S. make the transition?      

The SEC has stated that the best way to get things moving is to set a target date for the transition. There is speculation that the tentative transition date currently on the table is 2013. Because it will take companies some time to get ready, the FASB and International Accounting Standards Board (IASB) have agreed upon a target of 2011 for completion of all major projects. There would then be a two-year quiet period from 2011 to 2013 (so companies would not have to reprogram mid-stream during the transition).

What does this mean for the insurance industry? To begin with, it means that the days are numbered for U.S. GAAP standards such as Financial Accounting Standards (FAS) 60 and 5. But the date for this is still uncertain. If the IASB can get its insurance project done by 2011 (in the form of a final standard), then it would probably be implemented in the U.S. in 2013, with the rest of IFRS. If the IASB misses the 2011 window, then any change would probably be delayed until several years after 2013.

Another uncertainty is the final form for the IFRS replacement to FAS 60, FAS 5, and the rest of the U.S. GAAP standards that affect insurers. Loss reserves would most likely be discounted, with a risk margin. While unearned premium reserves may remain in something very close to their current form, this issue is still being debated with no consensus preference yet expressed by the IASB. However, the current IASB Board has shown distaste for recording “gains at issue.” Recording something other than the current unearned premium would result in an immediate gain or loss upon policy issuance.

All of this means that those interested and involved with insurers’ financial reporting are living in interesting times. When do we need to get ready for the transition? When will we know what we are transitioning to? Will the exposure draft of IASB’s new insurance accounting standard come out in 2009, making a 2011 date for finalizing the standard more likely, or will the date slip, making it more likely that insurance accounting will miss the 2011 window? Stay tuned.   

More Information: SEC Proposes Roadmap Toward Global Accounting Standards