Lindbergh

Question 1

List 2 reasons that private companies will need to understand IFRS accounting, even if they do not follow it, in order to remain competitive.

Answer 1

1. Raising capital in a foreign market

2. Conducting transactions with an international company

Question 2

List 2 concerns that the NAIC has about using IFRS as the basis for SAP:

Answer 2

1. Transition costs

2. Complexity of reserve calculations

Question 3

What is IASB’s definition of significant insurance risk:

Answer 3

Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance.

Question 4

Explain why the IASB standard of significant insurance risk is weaker than the GAAP standard:

Answer 4

GAAP requires that it is reasonably possible that the reinsurer may realize a significant loss.

Question 5

Describe the liability adequacy test:

Answer 5

The insurer needs to assess whether its insurance liabilities are adequate at each reporting date. This is based on current estimates of future cash flows, including the cost of handling the claims, and any options or guarantees.

Question 6

In IFRS 4, under what circumstances can an insurer change its accounting principles:

Answer 6

If that change:

• Makes the financial statements more relevant to the user’s decisions, without being less reliable; or
• Makes the statements more reliable, without being less relevant

Question 7

In GAAP, under what circumstances can an insurer change its accounting principles:

Answer 7

As long as they can justify that they are preferable to the current.

Question 8

Compare the GAAP to the IFRS treatment of offsetting:

Answer 8

Both do not allow offsetting

Question 9

Compare the GAAP to the IFRS treatment of revenue recognition:

Answer 9

• GAAP records the revenue associated with the insurance premium over the duration of the contract.
• IFRS recognizes the present value of all premium and expenses as soon as the contract is signed

Question 10

List 2 reasons that the volatility of results after IFRS is used should increase:

Answer 10

1. IFRS does not allow an unearned premium reserve, so the incoming revenue will not be smoothed over time
2. IFRS also does not recognize deferred acquisition costs

Question 11

Reason that insurer ratings should not deteriorate after IFRS is implemented, despite the higher volatility of results:

Answer 11

Users should benefit from the increased transparency

Question 12

Compare the GAAP to the IFRS treatment of catastrophe reserves:

Answer 12

Neither allow

Question 13

What categories must investment assets of insurers be grouped into under IFRS:

Answer 13

• Held to maturity: historic cost less amortization
• Available for sale: “marked to market”. Changes in market value are recorded in reserves
• Held for trading: “marked to market”. Changes in market value are recorded as income

Question 14

Explain the implications of the IFRS requirement that insurance contracts that have both insurance and investment features be unbundled and accounted for separately.

Answer 14

As a result, some products, that may be less profitable on a stand alone basis, may need to be modified or discontinued. In addition, some products (eg life insurance contracts) may need to be modified (shortened) to reduce the volatility.