CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Background for Fair ValueMajor Players and Possible Motivations

Casualty Actuarial Task Force

December 3, 2000

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Outline Purpose of accounting standards

Who’s Who - U.S. accounting standard setters.SECFASBAICPANAIC

How a U.S. accounting standard is made

Who’s Who - Int’l accounting standard setters

Why care about international standard setters

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Purpose of accounting standards Relevant (useful)

Predictive

FeedbackTimely

Reliable

Verifiability

Representational faithfulness

Neutrality

ComparabilityAcross years

Across companies (and industries?)

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Who’s Who - U.S. Accounting

Securities Exchange Commission (SEC)

Has legal authority (in U.S.) to establish financial accounting and reporting standards for publicly held companies

Relies on private sector (FASB, AICPA) to establish these standards

Retains veto power over FASB, AICPA.

Can issue its own standards (Staff Accounting Bulletins).

No jurisdiction over some privately held companies.

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Who’s Who - U.S. Accounting

Financial Accounting Standards Board (FASB)

Independent, privately funded.

Establishes U.S. GAAP standards

Can be vetoed or superceded by SEC

Veto power over AICPA standards.

Issues Statements of Financial Accounting Standards (SFAS)

Issues Statements of Financial Accounting Concepts (SFAC)

Standards are binding, concepts are non-binding guidelines for future standards

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Who’s Who - U.S. Accounting

American Institute of Certified Public Accountants (AICPA)

Professional organization

Issues Standards of Practice (SOPs) - I.e., rules on how to apply FASB standards.

Issues Audit Guides

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Development of Accounting Standards Takes Time

Concept Statement

New concepts statement may be needed if new conceptual ground covered. (only 7 SFACs currently exist).

Equivalent to Actuarial Statement of Principles.

Not binding, but provide guidelines for future standards.

Preliminary Views Document

Rarely issued.

Used to outline preliminary thinking, to obtain early feedback.

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Development of Accounting Standards Takes Time (cont.)

Discussion Draft Early draft of standard. May have several open issues. Intent is to gain feedback needed for drafting the standard..

Exposure Draft Full draft of the standard. May equal the final standard, if no comments received. Comment period can be 6 months long.

Final FASB Standard Effective sometime after issuance.

Complete process can take years (or longer).

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Who’s Who - International Accounting standard setters

IASC

Independent, private sector body (FASB model).

Made up of 153 professional accounting bodies in 112 countries.

Professional accounting bodies may or may not be the same as standard setters. They are in Canada, not in U.S.

As such, includes AICPA, but not FASB.

Seeks to “harmonize” the accounting principles used for financial reporting around the world.

No legal power to set standards in any country (similar to NAIC).

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Why care about international standard setters?

IASC Agreement with International Organization of Securities Commissions (IOSCO) July 1995

IOSCO will consider endorsing IAS for cross-border capital raising and listing purposes in ALL global markets - once core set of STANDARDS is completed.

Many stock exchanges already accept IAS for cross border listings - but not United States and Canada.

No guarantee that SEC will accept IAS

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Why care about international standard setters?

Exchange Total Number of

Companies Listed Domestic

Companies Foreign

Companies

NYSE 2,592 2,187 405

Germany 9,017 1,043 7,974

London 2,791 2,292 499

Australia 1,287 1,217 70

Tokyo 1,932 1,889 43

Globalization demands single set of accounting standards

Major Stock Exchanges currently have many foreign listers

1999 Results, as reported on www.fibv.com

CATF Session – December NAIC Meeting

FAIR VALUE - INTRODUCTION

Why care about international standard setters?

Q: How do you get 112 countries to agree on a single international standard?

A: Use a standard that does not already exist in any one country..

Q. What standard isn’t used by any one country, but still makes some theoretical sense?

A: Fair Value.

Q: How does fair value work?

A: Ralph Blanchard will discuss.