Workshop on international accounting

1. Workshop on international accounting IV Conference on Insurance Regulation and Supervision in Latin America Punta Cana, May 6-9 2003 Makoto Okubo, Advisor International Association of Insurance Supervisors (IAIS)

2. Main items • IASB Activities • IASB projects for insurance contracts • IASB projects for financial instruments (including contracts that do not qualify as insurance contracts) • Existing accounting practices for insurers • Questions Workshop on international accounting

3. I. IASB Activities • Why are international accounting standards in the limelight? • Globalisation • Other standards setting activities, including other financial sectors • Convergence of accounting standards • Seven liaison members (Australia & New Zealand, Canada, France, Germany, Japan, US, UK) • The EU will require the use of IAS and IFRS for publicly traded companies by 2005 with some exemptions, after the EU assesses standards whether to endorse for use. • FASB and IASB have issued a memorandum of understanding on October 2002 towards the harmonisation of US and international accounting standards. • Many jurisdictions (including those in Latin America) approved IAS for use. • Why is the role of the IAIS important in international accounting setting? • Insurance regulators are key stakeholders in accounting setting. • Insurance regulators need to decide the extent to which regulatory reporting may be based upon general-purpose financial statements. • Importance of the advice of the national insurance regulators in the implementation of international accounting standards. Workshop on international accounting

4. I. IASB Activities • IASB Active Projects (examples) • Improvements to existing International Financial Reporting Standards • Amendments to IAS 32, Financial Instruments: Disclosure and Presentation, and IAS 39, Financial Instruments: Recognition and Measurement • Activities of financial institutions: disclosures and presentation • Reporting performance • Insurance contracts, Phase I & Phase II • Concepts - revenue, liabilities and equity • IASB Active Research Topics (examples) • Aspects of accounting for financial instruments • The application of international accounting standards to small and medium-sized entities and in emerging economies Workshop on international accounting

5. 1997 1998 1999 2000 2001 2002 2003 2004 2005 I. IASB activities Planned schedule of IASB projects on insurance Financial Assets And Liabilities (other than insurance contracts) Amendments to IAS39 Exposure Draft 2002 June IFRS? JWG Launched 1997 October JWG Exposure Draft 2000 December (Note) JWG was disbanded. Discussion on the full fair value approach for financial instruments was slowed down to an active research topic, while insurance project remains taking the approach. Insurance contracts Field Visit Insurance Steering Committee Launched 1997 April Insurance Issues Paper 1999 December The Board starts discussion on insurance contracts 2001 November (Note) On May 2002, the Board split its project on insurance contracts into two phases. Phase I Exposure Draft (2Q) IFRS? Phase II Field Test? Exposure Draft? IFRS? (Note) The international Joint Working Group of Standard Setters (JWG) was established by the IASC Board and other national accounting standard-setters to develop an integrated and harmonised standard on financial instruments, which proposed the full fair value model for financial assets and liabilities. Workshop on international accounting

6. II. IASB proposals for insurance contracts Workshop on international accounting

7. Note 1: Example of insurance contracts Examples of insurance contracts under the proposed definition Examples of items that are not insurance contracts under the proposed definition Insurance against theft or damage to property Insurance against product liability, professional liability, civil liability or legal expenses Life insurance and prepaid funeral plans Life-contingent annuities and pensions Disability and medical cover Surety bonds, fidelity bonds, performance bonds, bid bonds Product warranties (Note: product warranties directly issued by manufactures and dealers are tentatively excluded) Title insurance Travel assistance Some catastrophe bonds Insurance swaps and other contracts that require a payment based on climatic, geological or other physical variables that cause an adverse effect on the holder of the contract Reinsurance Investment products that have the legal form of an insurance contract but do not expose the insurer to insurance risk Contracts that have the legal form of insurance, but that pass all significant insurance risk back to the policyholders through mechanisms such as performance-linking Self-insurance, in other words an entity’s decision to retain a risk that could have been covered by insurance A contract (such as a gambling contracts) that requires a payment if a specified uncertain future event occurs, but does not require that the event adversely affects the policyholder or other beneficiary specified in the contract Derivatives, in other words contracts that require one party to make payment based solely on financial risk, i.e. changes in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or similar variable. Contracts that require a payment based on climatic geological or other physical variables regardless of any adverse effect on the holder of the contract (commonly described as weather derivatives) (Source International Accounting Standards Committee Foundation) Workshop on international accounting

8. II. IASB proposals for insurance contracts (cont.) Workshop on international accounting

9. Note 2: Accounting models • The model is an asset-and-liability model in Phase II, rather than a deferral and matching model. • An asset-liability-model would: • Measure the assets and liabilities that arise from insurance contract. • Define income or expense as an increase or decrease in economic benefits during the accounting period, respectively. • Prohibit the recognition of assets or liabilities that do not meet the Framework’s definition or recognition criteria, including deferred acquisition costs. • A deferral and matching model would: • Recognise revenues and expenses from insurance contracts over time as services are provided. • Premiums are deferred and recognised as revenues over the term of the contract for short-term contracts and when received for longer-term contracts. • Acquisition costs are often deferred and amortised in order to match those costs with related premium revenue over the term of the contract. Workshop on international accounting

10. Note 3: Accounting models (cont.) A Simplified Example (Traditional): Deferral and Matching Approach A Simplified Example (Proposed Model): Asset-and-liability Measurement Approach Balance Sheet Cash & Investments XXX Deferred acquisition cost XXX Unearned premiums XXX Claims payable XXX Claims incurred but not reported XXX Equity XXX Balance Sheet FV of assets XXX FV of liabilities XXX Equity XXX Income Statement Premium earned XXX Claims incurred (XXX) Amortisation of acquisition cost (XXX) Maintenance costs (XXX) Profit or loss from insurance business XXX Investment income XXX (= Profit or loss from investing and Financing activities) Net profit or loss XXX Income Statement FV of current & future premiums XXX FV of current & future claims (XXX) Provision for risk and uncertainty XXX FV of current & future maintenance costs (XXX) Acquisition costs XXX Profit or loss from new business XXX Changes to estimates for previous years’ business XXX Profit or loss from insurance businessXXX Changes by passage of time XXX Changes to discount rate XXX Return on investments XXX Profit or loss from investing and XXX Financing activities Net profit or loss XXX Workshop on international accounting

11. III. IASB proposals for financial instruments (including contracts that do not qualify as insurance contracts) Workshop on international accounting

12. IV. Existing accounting practice for insurers Workshop on international accounting

13. V. Questions Please discuss the following questions in your group and make a brief presentation. (5 minutes for each group) • Which of your jurisdictions have already used or plan to use international accounting standards? (Note: The proposals may have an immediate impact in such jurisdictions. ) • What are existing accounting practices for insurers in your jurisdictions? • What would be your implications if the proposed accounting changes should be adopted? • IAS39 and JWG • Phase I and Phase II Workshop on international accounting

14. References • IASB Project summaries • IASB Project summary – Insurance Contracts (phase 1) (Latest revision: 2003/04/07) • IASB Project summary – Insurance Contracts (phase 2) (Latest revision: 2003/02/03) • Use of IAS Around the World • http://www.iasb.org.uk (Latest version 2002/07/11) • IAIS comment letters to the IASB • http://www.iaisweb.org Workshop on international accounting

15. Annex: Existing accounting practice for insurers Workshop on international accounting