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The Actuary The magazine of the Institute & Faculty of Actuaries
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Accounting for taste?

The International Accounting Standards Committee (IASC) is searching for what could be the ‘Holy Grail’ of accounting – a standard set of accounting rules acceptable worldwide. It has certainly got a battle on its hands. Virtually every country already has its own unique way of presenting accounts following rules that have been developed over many years. Given this legacy, it is certainly not surprising that friction has now developed over the adoption of rules.

Will US GAAP prevail over achieved profits? To avoid accusations of bias, an entirely new set of standards may now have to be created.What is the IASC trying to do? Not only is it attempting to simplify requirements for companies, it is also looking to make international investing much less prone to misleading information in accounts. The structural and territorial diversity of many groups makes it no easy matter to look at a set of reports and accounts and determine even the simplest of figures, such as the true net asset value. One key problem is the fact that accounts have to address so many different audiences. For example, the sort of detail that satisfies the regulator on solvency risk may well prove insufficient for an investor in a company.While progress seems likely on accounting for other industries, insurance is proving to be one of the most problematic areas for harmonisation. For assets, many countries still use book values or an intermediate stage between book values and market values. A general move away from book values towards market values seems sensible, although of course the age-old argument about volatility of accounts has to be countered. Use of market values certainly follows one of the primary objectives of accounting: representing a ‘true and fair’ position of the company in question. But what can be done when there is no available market value? Property and real estate values have always been difficult to determine because of their illiquidity, but this has not stopped companies from using valuations based on, for example, a surveyor’s opinion of market value.In theory, however, asset valuations are much less problematic than estimation of liabilities, especially the long-term liabilities of insurance companies. For accounting purposes life insurance liabilities are generally calculated by actuaries using a chosen set of assumptions. Accounts are then produced to show the statutory position of the company and further submissions to a regulator are often required to check that solvency is adequate and customers are being protected. Adding to the confusion, a different basis is often used for statutory solvency and reported accounts. Most of these methods fail to show a realistic value of insurance liabilities. For example, the basis used is often too conservative, future bonus is not explicitly included in the calculations. Even if a realistic basis is used, negative reserves are usually eliminated.It is, of course, worth bearing in mind that life companies already generally manage their business using realistic projections of assets and liabilities and many are moving towards stochastic modelling to produce a clearer risk profile of future solvency and cashflow. A move to realistic valuations for accounts and statutory solvency would simplify matters considerably for companies. But it is the use of market values for liabilities that will be the key to agreement.Clearly, there are many hurdles ahead for the IASC and it will take years for worldwide regulators and companies to adopt a common set of accounting regulations. However, all of the interested parties must see that the ultimate goal is worth achieving and should be prepared to be more accommodating in discussions on the subject.

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