Fair value The net present value of the solvency requirement, using the risk-free rate, is 72.6 million. Multiplying this by 6% results in the cost of capital: 4.4 million. The total fair value is 101.1 million (= 96.7 + 4.4). FAIR VALUE IN ACCOUNTING The accounting framework for insurance companies in Europe is laid down in the International Financial Reporting Standards (IFRS), a body of accounting principles developed by the International Accounting Standards Board (IASB). Previously the IASB issued International Accounting Standards (IAS), but since the early 2000s these have been gradually renamed into IFRS. For insurance companies, IAS39 is also an important principle because it regulates the valuation principles for assets and financial products. In 2004, the IASB published IFRS4 Insurance Contracts detailing the definition of an insurance contract. However, IFRS4 was considered an interim solution until the final details on fair value of an insur151

In 2007, the IASB issued a preliminary view paper and in 2010 it issued an official exposure draft, open for comments from the industry. The final proposals will be published in 2011, probably to be implemented by insurance companies by 2015 although the official implementation date is not yet fixed. The accounting body in the US, the Financial Accounting Setting Board (FASB), worked together with the IASB in order to also incorporate a fair value measure in the US Generally Accepted Accounting Principle (US GAAP). We will see in the remainder of this section that some differences exist between IFRS4 and Solvency II. However, both projects have taken an enormous step forward in aligning the frameworks and using fair value as the basis for the valuation of technical provisions. Let us firstly identify the differences in objective and focus between IFRS and Solvency II. Solvency II is a supervisory framework aimed at protecting policyholders. The IF

RS is a general accounting framework aimed at providing information to all economic decisionmakers. This could include policyholders, but also investors. Another difference between the frameworks is that Solvency II focuses on the balance sheet, in order to maintain an adequate capital buffer for policyholder protection. IFRS, on the other hand, does not only focus on the balance sheet, but also aims to reflect the changes between reporting periods by means of a P&L statement. Revenues and expenses need also to be presented adequately and consistently. In fact, there is no P&L statement in Solvency II. It can also be said that IFRS is a transaction-based framework because it focuses on the insurance contract as a legal transaction. In Solvency II it is clear what falls under the scope, since the first part of the Solvency II Directive explicitly explains that entities with an insurance licence are within its scope. IFRS4 explains that insurance contracts are contacts that trans

It may be that licensed entities do not fall under the IFRS4 definition and that IFRS4 qualifying contracts are sold by a non-licensed entity. In the calculations details, this could well result in complexities and differences. An example is a single premium unit-linked product that falls under IAS39 rather than IFRS4. However, it would fall under Solvency II if it was sold by a licensed insurer. Without going into the details of the accounting principles, the reader will understand that