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“International Accounting Standards”

Southeastern Actuaries ConferenceFall Meeting

Atlanta, GeorgiaNovember 20, 2003

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Annette M. KniefAnnette M. KniefAnnette M. KniefAnnette M. Knief

NAIC Financial Regulatory Services Assistant Director

Staff support to the Financial Condition (E) Committee, Examination Oversight Task Force, Risk Assessment Working Group, and various International Committees

Joined NAIC in October 1999

Prior to joining NAIC, Auditor for Deloitte & Touche, LLP in Chicago and Kansas City

Graduate University of Illinois

MBA, CPA, FLMI, ARA, AICPA

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Presentation Overview

What is the International Accounting Standards Board (IASB)?

Why is there a need for International Accounting Standards (IAS)?

Is there need to be involved in IAS Development?

IASB Insurance Contracts Project

Other current projects of the IASB

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What Is the International Accounting Standards Board (IASB)?

IASB Formed in 2001 - Preceded by IASC

IASC Formed in 1973 through agreement by:

Australia Japan Netherlands

Canada Ireland United Kingdom

France Mexico United States

Germany

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International Accounting Standards Board Members

Mary Barth Hans Georg Bruns

Tony Cope Robert Garnett

Gilbert Gelard Tricia O’Malley

James Leisenring John Smith

Warren McGregor Harry Schmid

Geoffrey Whittington Tatsumi Yamada

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IASB Structure

19 Trustees

Appoints, funds and oversees IASB, SAC and

SIC

SAC14

Member IASB

IFRIC

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International Accounting Standards ~ Board Objectives ~

To develop, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require high quality, transparent and comparable information in financial statements and other financial reporting to help participants in the world’s capital markets and other users make economic decisions

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To promote the use and rigorous application of those standards

To bring about convergence of national accounting standards and IAS to high quality solutions

IASB publishes its finalized Standards in series of International Financial Reporting Standards (IFRS) – Currently No. 1-41

International Accounting Standards ~ Board Objectives ~

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Why is there a need for International Accounting Standards?

Accounting principles and procedures vary widely from country to country

Multinational companies incur additional costs of preparing different reports for use in different countries

Accounting reports lack consistency

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Why is there a need for International Accounting Standards?

Financial analysis is more costly and less efficient

Lack of comparability causes the credibility of accounting to suffer

It does not make economic sense for every country to incur the enormous cost of developing its own national standards

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Why is there a need for International Accounting Standards?

Most stock exchanges already accept IAS for cross-border listings

Except:

Canada

Japan

United States

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2005 EU Requirement

European Union (EU) law will require European listed companies to adopt IAS in 2005.

Impact on US Companies:

US Subsidiaries that report up to EU listed companies

Foreign branch or subsidiaries that have local statutory reporting requirement under a converted national standard

Companies seeking capital on a European exchange

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Views of the SEC and IASB

“If, by 2005, there has been sufficient progress in the improvement and short-term convergence of accounting standards, in the development of a process and structure for consistent interpretation and application of IAS, and in the enhancement of financial reporting infrastructure, then it may be appropriate for us to reconsider the need for foreign private issuers . . . to reconcile from IAS to U.S. GAAP.”

– Harvey Pitt, Fmr. Chairman of the SEC

“While the United States' accounting standards are widely seen as the most comprehensive in the world, some deficiencies exist. Adoption of tougher international standards could solve that problem.”

- Sir David Tweedie, Chairman of the IASB

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GAAP Convergence 2002

Study by Leading Accounting Firms

92% of 59 countries surveyed plan to adopt, or plan to converge with IFRS

Over 50% of respondents indicated that the financial instruments standard and other standards incorporating fair value are the most complicated standards and impede convergence

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GAAP Convergence 2002

Study by Leading Accounting Firms

Three countries do not currently intend to converge with IFRS:

Iceland, Japan & Saudi Arabia

Supposedly, if IASB and FASB make significant progress towards convergence, the SEC will consider allowing non-domestic companies to file in the US under IFRS without requiring a reconciliation to US GAAP

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Need for Involvement in IAS Development?

IAS GAAP SAP

IASB and FASB 2002 Convergence Agreement

Minimize differences between bothstatutory accounting and general accounting requirements

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IASB Insurance Contracts Project

Primary focus of the NAIC

Originated by the IASC – “1999 Issues Paper”& Draft Statement of Principles (DSOP)

Two Phases:

Phase I: Interim solution for 2005 based on enhanced disclosure and minor modifications to current practices

Phase II: A long-term, fair value solution

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IASB Insurance Contracts Project

Phase IDetermination/Separation of insurance and investment contracts

Elimination of certain existing practices

Enhancement to the presentation and disclosure for insurance contracts

Exemption from hierarchy of IAS‘Sunset Clause’

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IASB Insurance Contracts Project

NAIC Positions on Phase I

Definition of insurance contract

Embedded Derivatives

Credit Insurance

Weather Derivatives

Unbundling of Insurance Contracts

Asset and Liability Measurement

Disclosures

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IASB Insurance Contracts Project

Phase II

Asset and Liability Accounting Model

Fair Value Measurement

Own Credit Standing

Discounting

Policyholder Behavior

Acquisition Costs

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IASB Insurance Contracts Project

Current Status

Phase I Exposure Draft

Comments Submitted October 2003

Phase I IFRS – March 2004

(effective 1/1/2005)

Phase II – Halted

Discussions to possibly resume in November 2003

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IASB Insurance Contracts Project

Industry Perspectives

ACLI/IAA

Asset and Liability Measurement

Group of North American Insurance Enterprises

Comment Letter – June 11, 2003

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Other Current Projects of the IASB

Improvements Project

Financial Instruments Project

Revenue Recognition

Reporting Performance

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Current Projects of the IASB

Consolidations (Including SPEs)

Business Combinations

Impairment and Intangible Assets

Convergence with the FASB

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NAIC International Website

NAIC Website:

http://www.naic.org/financial_services/international_accounting/index.htm

Comment Letters

Newsletters

General Information

Become an Interested Regulator/Party:

Annette Knief

phone: 816-783-8006

[email protected]

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