Insurers See Shortcomings in Updated Accounting Standard for Financial Instruments and Hedging Activities

NEW YORK, Sept. 9 /PRNewswire-USNewswire/ -- North American insurers and reinsurers expressed concern that the Financial Accounting Standards Board (FASB) proposed Accounting Standard Update designed to simplify existing accounting standards for financial instruments and hedging activities does not provide decision useful information to investors in insurance companies.

The Group of North American Insurance Enterprises (GNAIE) said the proposed update fell short of the FASB's objective of providing financial statement users with a more timely and representative description of an entity's involvement in financial instruments while reducing complexity in accounting for them.

In its comments to the FASB, GNAIE observed that these shortcomings are the result of "the limitations inherent in the classification and measurement proposals, in addition to measurement principles currently being discussed for insurance contracts in the joint FASB/IASB Insurance Contracts Project, may not provide investors in insurance companies more decision useful information."

The insurers specifically pointed out that income and capital measures monitored and analyzed by insurance company investors for purposes of making investment decisions would be significantly influenced by fair value movements that are expected to reverse over time and, therefore, will not be realized.

"To increase the decision usefulness of insurance company financial reports, we believe insurance companies should have the ability to align the measurement, classification and reporting of financial assets and liabilities with both the business strategy for the financial instruments and their business model," said GNAIE executive chair Jerry de St. Paer in an August 31 letter to FASB technical director Russell Golden.

While generally supporting the principle in the Exposure Draft that gains or losses expected to reverse in the context of the reporting entity's financial strategy should not result in changes in fair value being recorded in net income, GNAIE said it believes "the recognition of unrealized fluctuations in net income would be more misleading to investors."

At the same time GNAIE said it is concerned that the business strategy criteria specified in the Exposure Draft are too narrow, resulting in more fair value changes expected to reverse in the future being recorded in the income statement.

GNAIE observed that the general business model of insurance companies is to underwrite and mange a variety of risks while concurrently managing asset portfolios designed to provide the necessary cash flows to settle insurance obligations as they arise.  While the business strategy for insurance companies is generally to hold investments for the collection of cash flows, it noted there are a variety of circumstances that warrant a prudent level of asset selling that is consistent with the insurance business model.

GNAIE recommended that "the criteria for allowing companies to classify, measure and report financial assets and liabilities on a basis other than fair value with fair value changes reported in net income be expanded to allow for these prudent sales to occur without impacting the future ability to utilize an alternative measure method."

GNAIE also offered comments and recommendations on additional issues in the Accounting Standards Update.  The full letter and appendix are available on the GNAIE web site http://www.gnaie.net/fasb.htm.  

The goal of GNAIE is to ensure that international accounting standards result in high quality accounting and solvency standards for insurance companies and, to that end, to increase communications between North American based insurers and international regulators and standard setters.  GNAIE works to meet its goals through modeling of proposed accounting standards, analysis, comment and coordination with various end users of financial reports.

SOURCE Group of North American Insurance Enterprises