Background for Fair Value Major Players and Possible Motivations

1. Background for Fair ValueMajor Players and Possible Motivations Casualty Actuarial Task Force December 3, 2000

2. Outline • Purpose of accounting standards • Who’s Who - U.S. accounting standard setters. • SEC • FASB • AICPA • NAIC • How a U.S. accounting standard is made • Who’s Who - Int’l accounting standard setters • Why care about international standard setters

3. Purpose of accounting standards • Relevant (useful) Predictive Feedback Timely • Reliable Verifiability Representational faithfulness Neutrality • Comparability Across years Across companies (and industries?)

4. 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.

5. 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 Establishes U.S. GAAP standards Can be vetoed or superceded by SEC Veto power over AICPA standards.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

6. 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

7. 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.

8. 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).

9. 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).

10. 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

11. 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

12. 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.