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Insurance Rules to Create Accounting Issues

insurance accounting issuesThe International Financial Reporting Standards (IFRS) have proposed a change to the way that insurance contracts are accounted for under their systems, which is threatening to make insurance companies’ financial statements more and more complex and less understandable. The International Accounting Standards Board received a letter from the Financial Reporting Council, warning that measuring and presenting insurance liabilities under ‘other comprehensive income’ (OCI) is going to create a number of accounting mismatches. It is also likely to lead to asset liability mismatch “being hardcoded into accounting for insurance contracts.”

The FRC is claiming that a mismatch of this magnitude will incentivise insurers to keep a hold of certain assets that attain a fair value (through OCI). These assets include corporate debt, rather than those compulsorily required to be fair value though the profit & loss (P&L) - such as equities. Roger Marshall, FRC’s chair of accounting, said: “This will result in increased complexity in the financial statements rendering them less understandable for users,” he said in response to the updated set of standards.

Marshall thinks the International Accounting Standards Board (IASB) should “revise their changes and consider making the requirements for classification and measurement of insurance contracts consistent with those for financial assets.” He added: “This would entail requiring insurance liabilities to be classified as FV-PL with an option to recognise and present them in OCI based on business models and the nature of the liability.”

The IASB have updated their rules in relation to insurance contracts in June, following a public consultation on the situation that was first addressed in 2010. This set of rules was the first of its kind – governing insurance contracts accounting. The FRC admitted that their latest exposure draft has taken positive strides towards addressing the flaws in the first model, but it still needs further additions and amendments to improve it, such as a mirroring approach for the measurement of assets and liabilities where the contract specifies a link to returns on those underlying items.

James Savery, 13 September 2013

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