Background for Fair Value Major Players and Possible Motivations

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Background for Fair ValueMajor Players and
Possible Motivations

• Casualty Actuarial Task Force
• December 3, 2000

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Outline

• Purpose of accounting standards
• Whos Who - U.S. accounting standard setters.
• SEC
• FASB
• AICPA
• NAIC
• How a U.S. accounting standard is made
• Whos Who - Intl accounting standard setters
• Why care about international standard setters

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Purpose of accounting standards

• Relevant (useful)
• Predictive
• Feedback
• Timely
• Reliable
• Verifiability
• Representational faithfulness
• Neutrality
• Comparability
• Across years
• Across companies (and industries?)

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Whos 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.

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Whos 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• Can be vetoed or superceded by SEC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

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Whos 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

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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.

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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).

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Whos 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).

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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

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Why care about international standard setters?
Globalization demands single set of accounting
standards Major Stock Exchanges currently have
many foreign listers
1999 Results, as reported on www.fibv.com
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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 isnt 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.