International Accounting Standards U.S. Effect Assessed

The confluence of international accounting standards with U.S. accounting standards is a "wake-up call for everyone including analysts, according to Steve Ader, a director with Standard & Poor's Corp., New York.

The discussion of international accounting events was held during a panel session at the recent S&P 2008 Insurance Conference in New York.

U.S. participation in the development of international standards was also an issue raised during the National Association of Insurance Commissioners, Kansas City, Mo., according to discussions held during the International Insurance Relations "G" Committee at the recent summer NAIC meeting.

Rob Jones, also an S&P managing director, noted during the panel that "there is a train coming down the tunnel and it may be a freight train." Small companies could face challenges, he said.

Much of the panel focused on details of a discussion paper developed by the International Accounting Standards Board, London, that considers the possibility of using fair value accounting for a company's liabilities.

S&P's Ader said that there is no perfect fair value accounting system, and what is really important is a "consistent set of rules" and disclosure so that analysts and the general public can better understand a company after reading financial statements.

Ader explained that to account for theoretical exposures in the financial statements is not right. As an example, he said that if a company is based in Miami and is required to reflect exposure to an anticipated bad hurricane season that never materializes, it is not an accurate reflection of the company.

Jerry de St. Paer, a senior vice president with American International Group and chairman of the Group of North American Insurance Enterprises, both in New York, also addressed the issue. He maintained that GNAIE favors a single set of principles-based accounting standards and that everyone is starting with the same goal as the IASB.

But fair value does not work and does not represent the nature of the insurance business, he continued. The current exit or fair value at the end of liabilities assumes that is able to sell contracts to a hypothetical insurer or to a hypothetical business.

"Our view is that the only time that there is a willing seller and buyer is when that policy is sold and the premium reflects FV," he said. "It is inappropriate to reflect profit until it is earned."

Mark Trench, a project manager with the Financial Accounting Standards Board, Norwalk, Conn., also discussed the project.

Trench noted that he was offering his own insight and not representing the FASB. He said that it was anticipated that the FASB would decide in the third quarter of this year whether or not to participate in the insurance contracts project being undertaken by the IASB.

International accounting issues also proceeded during the recent summer NAIC meeting when the International Insurance Relations 'G' Committee met.

Progress reports were delivered during the International Solvency & Accounting 'E' working group. Highlights include:

--a discussion of a recent IAIS solvency subcommittee meeting during which it was decided by the subcommittee chair to request that the IAA evaluate each country's solvency system numerically at a level of confidence; and,

--a reminder to attendees that there is an upcoming IAIS insurance contracts subcommittee coming up on June 26-27.

"No one has fully thought through the implications of convergence" and what the transition to a new accounting system will mean, according to Phil Carson, assistant general counsel with the American Insurers Association, Washington. Convergence is a top international accounting issue for AIA, he says.

Regulators need to be in tune with what is going on at a global level, which could conceivably mean moving toward international financial reporting standards developed by the IASB. If in fact this does happen, Carson says that it could mean significant changes in statutory accounting and for the regulators responsible for SAP.

If these changes proceed, it could be a bigger project than the Codification of Statutory Accounting Principles, says Carson. Codification was a major NAIC project that took several years and enormous regulator and industry participation to put in place.

Carson noted that the Securities and Exchange Commission is taking steps to facilitate convergence such as eliminating a requirement that foreign companies issuing securities in the United States reconcile their IFRS-based financial statements to U.S. GAAP reporting standards. And now, the SEC is considering giving U.S. companies the option of using GAAP or IFRS, he continues.

Another important issue for AIA is fair value accounting, Carson says. It is already important on the asset side of the balance sheet where guidance such as FAS 157 defines fair value and how it should be interpreted and applied, he adds.

Since fair value concepts also affect the liability side of the balance sheet, significant concerns arise when fair value concepts as contemplated by the International Accounting Standards Board (identified as "exit value" in the IASB discussion paper) are applied to insurance contract liabilities, he notes.

A third issue that is important to insurers, according to Carson, is the development of Solvency II and how new international solvency standards will impact carriers in the U.S.