International Accounting Standards for Insurance: A Work in Progress
by Bruce Moore
The International Accounting Standards Committee (IASC) is beginning work on developing standards for the insurance industry-a development that actuaries involved in financial reporting or international operations should follow.
International Accounting Standards (IAS) are developed by the IASC, a body similar in role and operations to the Financial Accounting Standards Board (FASB) in the U.S. and several similar bodies in other countries. The IASC has part-time board representatives from around the world specializing in accounting, industry, accounting education, and financial analysis.
The growth in recent years in corporate financing across borders has increased the importance of IAS. Companies seeking to raise capital in multiple national capital markets now potentially face the burden of preparing financial statements based on several different national accounting standards. To avoid the additional cost and inconvenience of this burden, there is a desire to have securities regulators around the world recognize generally accepted IAS for financial statements. There is also pressure from the financial analyst community to have more meaningful IAS.
This has led to a push to fill perceived gaps in the existing IAS, to provide a solid foundation for reporting results internationally. The current work on a new IAS pension standard is part of that process. The current target is for core standards generally applicable to all industries to be in place by Spring 1998. At that point there will be an effort to forge a general agreement among international securities regulators that these should be acceptable for foreign companies raising capital in the future. Securities regulators will undoubtedly retain the right to review each case going forward, but, it is hoped, with a strong inclination to accept IAS.
In addition to the standards generally acceptable to all industries, the IASC will be pursuing industry-specific standards, including standards for the insurance industry. Insurance has been given a high priority, but with the understanding that the IASC will not have time to devote to it until after the March 1998 target for the more broadly applicable standards. The current plan is to have IASC staff begin working on these standards now, with IASC consideration of them to begin some time in 1998 and final approval in early 1999.
The actuarial profession is organizing to participate in this process. The International Federation of Actuarial Associations (IFAA) has formed a subcommittee chaired by Sam Gutterman to respond to the IASC Committee on Insurance Principles. The American Academy of Actuaries has also formed a working group to support this review process, providing its input through the IFAA comment process.
In March 1997, the IASC released a discussion paper on "Accounting for Financial Assets and Financial Liabilities." The deadline for comments was July 1997. Intended to apply to insurance enterprises as well as other businesses, the discussion paper takes the position that "fair value" is the appropriate basis for valuing financial assets and liabilities, including insurance and reinsurance obligations. The paper concedes that further work needs to be done to determine how to apply those principles to insurance, reinsurance, and pension obligations, but asserts that those are the basic principles that should be followed.
The international standards are not intended to replace U.S. Generally Accepted Accounting Principles (GAAP) for U.S. companies. However, many U.S. actuaries work for subsidiaries of large foreign insurers that have shown interest in raising capital in U.S. markets-some companies have even converted to U.S. GAAP for that purpose. This development will be especially of interest for these companies.
Further, to the extent that the IASC develops standards for insurance significantly different from U.S. GAAP, this will create an uneven playing field in the capital markets and ultimately in the insurance markets. In turn, the development of these standards may well lead to pressure on the FASB to reconsider its insurance standards. Consequently, this process could have important implications for all financial reporting actuaries.