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Draft for discussion at ICAEW IISC meeting, 20th June 2005 - page 26 / 51





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This project too is closely related to the need to determine the appropriate ‘fair value’ basis for accounting for insurance contracts, as well as to underlying issues of ‘what is an asset?’ (e.g. with regard to future premiums) and ‘what are debt and equity?’ (e.g. in relation to the FFA / ‘estate’).

Running through all these four projects is an underlying concern with how to reconcile the ‘asset-liability’ approach, that is fundamental to the Boards’ current conceptual frameworks, with the continuing attachment by practitioners and users to the ‘matching’ approach to revenue and income recognition in ensuring the ‘quality of earnings’.58 Particularly contentious issues that have arisen under each project include:

  • Under projects 1) and 2), whether accounting at fair value can/should give rise to a ‘day one profit’ on inception of a contract, and whether the discount rate used in arriving at a present value for a liability should reflect rates expected to be earned on risky assets

  • Under project 3), how the reporting and analysis of performance should be affected by revisions to original estimates and changes in credit rating

  • Under project 4), the centrality of the ‘asset/liability’ model

  • Under all these projects, the interrelation of accounting used for purposes of the ‘management control cycle’ (of planning, budgeting, evaluating performance and revising plans) and that used for providing information to owners (stockholders) and to the capital markets for company valuation

The nature of the Boards’ agenda processes necessitates division of work into separately identified project areas just as individual standards tend to focus on particular aspects of income and financial position reporting. However, the ongoing project of the IASB on insurance requires consideration of all the aspects of accounting for a particular industry. Even though IASB has labelled its insurance project ‘insurance contracts’, in reality the focus of discussion and comment is on accounting for the insurance industry,59 while the discussions about insurance assets and liabilities, revenue recognition and performance reporting are inextricably linked to the more mainstream discussions about ‘fair value’ reporting of financial instruments. The insurance project’s own progress (or lack of it) is revealing a need to require a re-evaluation of the adequacy of the Boards’ conceptual frameworks, and in particular of the role of the ‘asset/liability’ model as well as of the analysis between ‘liabilities’ and ‘equity’, which is problematic in mutual insurance enterprises or in non-life insurance with respect to ‘equalisation and catastrophe reserves’, or where life policyholders participate in profits (as e.g. in UK ‘with-profits’ life business).

58 ‘Quality of earnings’ may be assessed in various ways, including persistency (e.g. Christensen & Demski, 2003, p.175), or as reflecting the appropriateness of GAAP and/or non-manipulation in the application of appropriate GAAP (e.g. Penman, 2000).

59 The project does not address accounting by policyholders, except in so far as insurers and reinsurers themselves reinsure.


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