IAS 37 & 39

    The following information was provided by Burton Jay (he works at Mutual of Omaha) in early 2003, and is simply intended as a general description of the topic. The likelihood of this happening during our lifetimes is REMOTE, but as your webmaster, I suspect the implications and mechanics of how international decisions impact the Actuarial profession, may be of interest to you. PLEASE KEEP IN MIND that this webpage is ONLY intended to ROUGHLY familiarize the reader with the subject material. If you have any contributions, or corrections, please contact the Webmaster.

General Information About IAS 37 & 39

    IAS 37 is a developing international accounting proposal that specifically deals with insurance contract liabilities, which, in the short term will generally leave in place the main features of the accounting systems now being used by the various countries, including U. S. GAAP. The requirements of IAS 37 and 39, even after the "Improvements Project" is complete will generally still allow the current deferral and matching treatment prescribed by GAAP accounting. However, assets and liabilities that are designated "available for trading" would be valued at "fair value". This is already the treatment prescribed for financial assets by current U. S. GAAP accounting.

    Long range, the International Accounting Standards Board, IASB, would like to move to "fair value" accounting for all financial instruments, including insurance contract liabilities. FASB has the goal of "convergence" of U. S. standards to International standards and provides important input into the development of international standards. Both the FASB and the IASB favor fair value accounting of financial instruments as conceptually the best system, but there is much resistance by various financial industries around the world and there will be substantial implementation challenges in converting the current accounting systems to a fair value system. However, this is not likely to be required in the U. S. for a very long time.

    Cash flow testing and value added calculations would not be effected by any changes in to IAS 32 and 37. Cash flow testing is generally to support capital adequacy concerns. Capital adequacy (or RBC) is another separate topic that is also being heavily addressed by the international financial service community.

    It should be noted that the primary purpose of fair value reserves is to report earnings. By definition, fair value reserves will only be adequate to mature insurance contracts about half the time. Additional capital would be required to assure solvency at some prescribed confidence level.