Impact of Insurance Accounting on Business Reality and Financial Stability

This paper deals with the development of International Financial Reporting Standards on the insurance industry particularly the impact of "fair value" accounting as encompassed in "International Accounting Standard 39: Financial Instruments; recognition and measurement" and in the current insurance project of the International Accounting Standards Board. It outlines the background and developments in this area together with a summary of the present position. There is no present consensus on an appropriate basis for insurance accounting and from 2005 the industry will almost certainly have to deal with a mixed model for accounting which would have assets accounted for at fair value whilst liabilities are primarily accounted for as at present. The standard setters' current goal would be to have a full fair value reporting system in place by 2007. The paper covers the issues in respect of capital and products that this position gives rise to. Despite the uncertainty surrounding the development of a new standard, it is apparent that the insurance industry will have to deal with very significant changes in its financial reporting and these changes have potentially major consequences for the nature of the business. Insurance companies need to continue to pay attention to the on-going accounting debate over reporting standards and ensure that an industry voice is heard in the determination of a standard which reflects the present business reality and economic position and is also truly useful to the users of financial statements.