An Experiment in Fair Value Accounting? The State of the Art in Research and Thought Leadership on Accounting for Life Assurance in the UK and Continental Europe

Abstract

'Fair value' is currently the central topic of debate in the development of accounting standards. While it has now been defined to mean an exit price in US GAAP, the IASB is still considering its own definition, and some commentators are arguing for versions of entry price, or for differing prices in different circumstances or for different types of asset and liability. The FASB and IASB are aiming to achieve full fair value accounting for financial instruments, and both have already made this optional in many circumstances. But both theoretical and practical challenges still remain to a mandatory requirement. And whether fair values (exit or entry) should be used in revenue recognition and in presenting performance; and how far changes in fair value should be recognised as gains and losses in income or earnings when markets are not deep and active, remain hotly contested areas of dispute. Such measurement issues are likely to prove the most controversial stage in the current revision and convergence of the FASB's and IASB's conceptual frameworks.

One industry where practical experiments in wholesale fair value accounting have been developing in the UK and elsewhere since the 1990s is life insurance. Standard setters have also taken up the challenge of determining the most appropriate accounting. The latest proposals from IASB, under 'Phase II' of its project on insurance contracts, that are currently out for discussion now contemplate requiring a form of fair value accounting by insurers. While insurance is often regarded as the technical preserve of industry specialists and the actuarial profession, most of the issues of principle are common to accounting for all kinds of assets and liabilities in all kinds of businesses. The life insurance experiments and related debates can therefore help to illuminate the wider discussion of the future role of fair value accounting. And what is decided as the standard for life insurance may in turn change the way accounting is done more generally - or alternatively fear of such a consequence may end up inhibiting the adoption of the best alternative for insurance. So the arguments about life insurance accounting are too important to be left to those directly involved in it.

Keywords: Insurance, fair value, measurement base, performance measurement

JEL Classification: M41, M44, M47, G22, G12