Moody’s: Accounting Standards Reasonable & An Improvement

The IASB and FASB published the proposed changes last July and September, respectively.

"Inconsistency in accounting and reporting has long made it difficult to compare insurers globally," said Moody's analyst and author of the report Wallace Enman. "We therefore support the boards' goal of improving cross-border consistency."

Earlier this year, an investor's note from Sandler O'Neill & Partners said the proposed new standard would increase earnings volatility. The firm said it preferred the current generally accepted accounting principles (GAAP) standards.

Last week, Standard & Poor's released an analysis stating that proposed changes will introduce volatility into financial statements. S&P said the IASB model is an improvement to the current accounting for insurance contracts but added that historical trend analysis could be difficult and may be impossible because the accounting changes are "so pervasive."

Moody's said that, beyond increasing consistency, the overall approach by the IASB and FASB is "reasonable."

Mr. Enman said he believes the model used by the proposed new standards for long-duration insurance contracts "appropriately represents the underlying economics" of those contracts and described as "suitable" the method for short duration business.

Moody's said a transition to the new rules is unlikely to have a broad impact on ratings "because new accounting rules do not, of themselves, alter an insurer's economic position."

But Mr. Enman noted that credit ratings could be impacted if companies change their behavior or business models as a result of the new rules.

Moody's also said it has concerns with the proposals "related in particular to the determination of an appropriate discount rate to apply to expected cash flows, the alignment of the insurance contract proposal with measurement of assets under the boards' financial instrument accounting rules, and presentation and disclosure."