The failure to achieve a convergence in accounting standards for insurance contracts by U.S. and international standards setters is a negative for global investors, says Moody’s Investors Service in a new report.
The rating agency says that the decision last week by the U.S. Financial Accounting Standards Board (FASB) to abandon its convergence efforts with the International Accounting Standards Board (IASB) on insurance contracts will result in a U.S. insurance accounting model that diverges significantly from the insurance accounting model proposed by the IASB. And, it says, this decision is negative for investors that would have benefited from more comparable financial statements.
Moody’s says that it has been supportive of efforts to develop a single set of high-quality, globally applicable accounting standards for insurance contracts. “Inconsistency in accounting and reporting has long made it difficult to compare insurers with cross-border peers,” it notes. “Therefore, the FASB’s decision to abandon convergence efforts is negative for global investors because they will not benefit from improved comparability of financial statements of insurers reporting under US GAAP and IFRS.”
Instead of seeking a single set of standards, Moody’s says that FASB will focus its efforts on making targeted improvements to the existing US GAAP insurance accounting model. It notes that for short-duration contracts (primarily property and casualty insurance), the FASB decided that its targeted improvements should focus only on disclosure requirements; for long-duration contracts, such as life and annuity business, the targeted improvements will consider recognition, measurement and disclosure. “We agree that current GAAP accounting for long-duration contracts is complex and requires improvement, and targeted improvements and enhanced disclosures may improve information content for investors,” it says.
Moody’s also notes that many investors in U.S. insurers had expressed significant opposition to the FASB proposal, and suggested they did not see the need for dramatic changes to existing U.S. rules (particularly for P&C insurers). “The transition to targeted improvements to the existing insurance accounting framework greatly reduces the possibility that investors would avoid or discount the sector as a result of fundamentally transformed accounting. Therefore, the FASB’s decision removes the downside risk of diminished investor interest in US insurers,” Moody’s adds.
The IASB will continue with its project to create a standard for insurance contracts, and Moody’s expects it to issue a final standard this year, with implementation coming later in the decade. “The finalization of a comprehensive standard will benefit investors in insurers filing under IFRS, because current accounting for insurance companies is inconsistent among IFRS filers,” it says.