IASB issues ED 5 on insurance contracts

31 Jul 2003

The IASB has issued ED 5 'Insurance Contracts'.

Comment deadline is 31 October 2003.

ED 5 sets out the Board's proposals in Phase I of a two-part project. ED 5 provides guidance on applying existing IFRS to accounting insurance contracts and requires additional disclosures.

The Board intends this Standard to be effective in time for the changeover to IFRS in Europe in 2005. Phase II is a comprehensive project that is taking a complete fresh look at insurance accounting.

We have prepared an Special Global Edition of our IAS Plus Newsletter (PDF 46k) summarising the proposals in the exposure draft.

Here are a few of the key proposals:

Some of the key proposals in ED 5 Insurance Contracts
  • In recognising and measuring insurance liabilities, catastrophe and equalisation provisions would be prohibited.
  • An insurer must carry out a loss recognition test relating to losses already incurred at each balance sheet date and, if necessary, adjust its insurance liabilities through net profit or loss.
  • In applying IAS 39, an insurer would not be required to separate, and measure at fair value, a policyholder's option to surrender an insurance contract for a fixed amount. But that exception would not apply if the surrender value varies based on the change in an equity or commodity price or index.
  • If an insurance contract contains both an insurance component and a deposit (investment) component, the deposit component must be treated as a financial liability or financial asset under IAS 39. As a result, the insurer would not recognise premium receipts for the deposit component as revenue.
  • The fair value of a demand feature (such as a demand deposit) can be no less than the amount payable on demand. Cash surrender and maturity values of many traditional insurance contracts would not generally be classified as a deposit component.
  • Insurance liabilities cannot be offset against related reinsurance assets.
  • Income and expense from reinsurance contracts cannot be netted against related expense or income from the underlying insurance contracts.
  • ED 5 would not require discounting or specify a discount rate.
  • ED 5 would not prohibit or require deferral of policy acquisition costs.
  • ED 5 would not require all insurance subsidiaries of a single parent to use same accounting policies.
  • An insurer cannot change the measurement basis for its insurance liabilities simply by the purchase of reinsurance.
  • Many new disclosures are proposed, including fair values of insurance assets and insurance liabilities (starting from 1 January 2006).



Click for IASB Press Release (PDF 33k).


SEC Chairman reviews progress in restoring investor confidence

31 Jul 2003

Speaking to the US National Press Club on the first anniversary of the signing of the Sarbanes-Oxley Act, SEC Chairman William H.

Donaldson reviewed "how Sarbanes-Oxley is helping to restore investor confidence and improve the integrity of corporate America" and outlined "the agenda beyond Sarbanes-Oxley". Click for Full Text of Mr. Donaldson's remarks.

IASB and FASB differ on tax effects of share-based payment

31 Jul 2003

In separate meetings last week, the IASB and the FASB reached different conclusions on accounting for the income tax effects of share-based compensation transactions with employees.

The IASB reaffirmed the proposal in ED 2 that all tax effects of such transactions should be recognised in profit or loss. The FASB, on the other hand, concluded that if a deduction reported on a tax return for share-based compensation exceeds the cumulative compensation expense recognised for accounting purposes, the tax benefit of the excess is a direct credit to equity, which is the existing requirement of SFAS 123, Accounting for Stock-Based Compensation.

EFRAG recommends that the European Commission adopt IFRS 1

30 Jul 2003

In a Letter to the European Commission (PDF 15k), the European Financial Reporting Advisory Group has recommended the adoption in Europe of IFRS 1, First-time Adoption of International Financial Reporting Standards. .

In a Letter to the European Commission (PDF 15k), the European Financial Reporting Advisory Group has recommended the adoption in Europe of IFRS 1, First-time Adoption of International Financial Reporting Standards.

EFRAG comment letter on IFRIC D1 is posted

29 Jul 2003

We have posted EFRAG's Comment Letter on IFRIC Draft Interpretation 1, 'Emission Rights'.

Click for EFRAG's Comment Letter on IFRIC Draft Interpretation 1, 'Emission Rights'.

You will find information about EFRAG and its other comment letters Here.


German ASB aligns work programme with IASB

29 Jul 2003

The German Accounting Standards Board has revised its Work Programme to make cooperation with IASB and other major national standard setters its primary objective.

"Projects to further German financial reporting will take a lesser role." This Newsletter explains the GASB's new strategy.

Extending the use of IFRS in Ireland

29 Jul 2003

The Institute of Chartered Accountants in Ireland (ICAI) has called for the government to decide quickly whether the IFRS requirement for all listed companies from 2005 onwards will be extended to non-listed companies and to individual company accounts.

An ICAI Announcement noted: "A recent survey conducted by Deloitte and Touche in March indicated that only half of business managers are prepared for IAS. The survey also found that businesses had a negative attitude to the new standards believing that they would increase costs and reporting requirements. It is now up to the Government to address this situation by running an information campaign about these pending changes. The sooner they start the better." The UK government has announced that IFRS will be permitted, but not required, for non-listed companies and individual company accounts.

IFAC proposes new code of ethics

28 Jul 2003

The International Federation of Accountants has issued an exposure draft of a Revised Code of Ethics, expanding both the guidance and authority of the existing Code.

Comments are due by 30 November 2003. IFAC proposes to elevate the Code from a "model code" on which to base national requirements to a "standard" that requires IFAC member body compliance. IFAC has 155 member organisations in 113 countries. The proposed revised Code expands guidance for all individual accountants – addressing integrity, objectivity, professional competence, confidentiality, and professional behavior. The revised Code also provides specific guidance for accountants in business by addressing issues such as potential conflicts, preparing and reporting information, financial interests, inducements, and disclosing of information.

SEC publishes study on principles-based accounting

27 Jul 2003

The US Securities and Exchange Commission has released a staff study on the adoption of a principles-based accounting system for US financial reporting.

The study was conducted pursuant to the provisions of Section 108(d) of the Sarbanes-Oxley Act of 2002 and has been submitted to committees in both Houses of the US Congress. The study recommends that accounting standards should be developed using a principles-based approach and that such standards should have the following characteristics:

  • Be based on an improved and consistently applied conceptual framework.
  • Clearly state the accounting objective of the standard.
  • Provide sufficient detail and structure so that the standard can be operationalised and applied on a consistent basis.
  • Minimize the use of exceptions from the standard.
  • Avoid use of percentage tests ("bright-lines") that allow financial engineers to achieve technical compliance with the standard while evading the intent of the standard.

The SEC study noted that: An additional benefit is the facilitation of greater convergence between US GAAP and international standards. Standard setters can come to an agreement on a principle more rapidly than they can on a highly detailed rule. The benefits of convergence include greater comparability and improved capital formation globally. Click here to go to the Full Text of the Study on SEC Website, or Download a PDF Version (495k), or view the SEC Press Release.

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