I crib this slide (pdf) from the opening session of the Casualty Actuarial Society’s loss reserving seminar last month in Orlando. The slide shows concisely the key difference between how IASB wants to measure loss reserves and what FASB is contemplating.
(IASB sets international accounting standards, which each country adopts independently. FASB sets standards for the U.S. Pretty much all parties involved want the U.S. standards to more or less converge with the international standards. That makes everybody’s balance sheets easier to read.)
First, at the bottom of the each pyramid – it’s a little hard to read here. It says, “current unbiased, probability-weighted estimates of future cash flows.” (That is, discounted reserves.)
To that amount, both IASB and FASB want to add a margin – the stuff at the top of the pyramid. IASB wants two adjustments, one for risk and one that holds future profits on the contract. Both will be released over time, as the contract matures. FASB wants only one margin, but it will cover the same two things that IASB wants covered separately. It will also be released as the contract matures.
FASB is thinking it’s too hard to split the margin in two, and you don’t gain much by doing so. So why bother?