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Fair Value vs Historical Cost
- fair value: price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
- if no such market, estimate --> mark-to-model rather than mark-to-market
- historical value: price at which an asset or liability was originally obtained
- may need to consider amortization / depreciation
- (+) more reliable
- (-) less relevant
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Recognition vs Measurement
- different probability standards (when to record / measure)
- multiple recognition triggers and measurement rules
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Deferral-Matching vs Asset-Liability
- deferral-matching: focuses on income statement more than balance sheet (eg: earned vs written premium)
- balance sheet accounts: DAC (deferred acquisition costs); unearned premium liabilities
- (+) timing of profit emergence - steady pattern
- (+) reliable measure of value @ reporting date
- asset-liability: focus is on value of assets that exist as of balance sheet date
- would not recognize DAC or unearned premium liability beyond loss
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Impairment
- test used to prevent inconsistencies between 2 valuations using diff accounting framework
- asset considered impaired if no longer expected to produce the economic benefits expected when first acquired
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Revenue Recognition
- when is revenue recognized?
- deferral-matching: as service is rendered
- asset-liability: when acquiring asset (up front)
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Reporting Segment
- regulatory financial statements usually required on non-consolidated basis (eg: banking vs insurance)
- GAAP requires reporting at the reporting segment level - can be split by product / region depending on autonomy of management
- required items by segment - not all items (eg: income statement by segment, but not balance sheet)
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Change in accounting principle vs estimate
- principle: may require special disclosure of the change, with recalculation for prior period results
- estimate: generally affects only the latest period
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Principle-Based vs Rule-Based
- principle-based: rely on interpretation and judgment
- (+) flexible to new and changing products / environment
- (+) require less maintenance
- (-) more difficult to audit
- (-) concern over consistent and reliable interpretations
- (-) can be used to manipulate results
- rule-based
- (+)
easier to audit - (+) produce more consistent and comparable reports
- (-) lack of flexibility to changing products / environement
- (-) requires more maintenance
- (-) may be subject to manipulation (too literal)
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