Best’s Special Report: U.S. Accounting Change May Lead to More Volatility in GAAP Results

OLDWICK, N.J.–(BUSINESS WIRE)–Net income levels for publicly traded companies have the potential to
swing sharply under a new accounting standard that requires net
unrealized capital gains and losses on equity holdings to be reconciled
within income statements, according to a new A.M. Best report.

While the exact impact on year-over-year results won’t be realized until
after Dec. 31, 2018, a Best’s Special Report, titled, “U.S.
Accounting Change May Lead to More Volatility in GAAP Results,” includes
a preliminary analysis on the six-month 2018 results for a portfolio of
55 insurance companies across the United States, Canada and Bermuda,
operating under Generally Accepted Accounting Principles.

The impact of the new standard — Accounting Standards Update 2016-01 —
reveals that recorded net income decreased overall by 50% in the first
quarter for this group in aggregate, but then increased by 36.1% in the
second quarter. The full impact on each company’s six-month performance
under this new standard is detailed in the report, which takes note of a
“seesaw potential.”

The report also notes that these results are not always transparent. In
many cases, unrealized equity gains will be reported within a larger
number, such as other income, net investment income or as part of
realized gains since they have effectively been recorded through the
income statement as part of earnings. Companies with no holdings in
equities will remain unaffected.

Some industry observers are concerned about the impact of this new
accounting standard. On the one hand, the economics of the situation may
not have changed—under both previous and current treatments, unrealized
gains and losses ultimately end up within the equity section of the
balance sheet. However, the fact that they are now recorded as part of
net income results in a much higher profile, affecting such items as
loan covenants, compensation and general investor awareness.

“The key for analysts will be eliminating ‘noise’ when determining
operating income,” said Peter Walsh, Director, Corporate Data Management
at A.M. Best.

The shift toward the new standard fits into the overall movement by the
Financial Accounting Standards Board and the International Accounting
Standards Board (IASB) toward global consistency and “fair value
accounting.”

To access the full copy of this Best’s Special Report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=279898.

A.M. Best is a global rating agency and information provider with a
unique focus on the insurance industry. Visit
www.ambest.com
for more information
.

Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its
affiliates. ALL RIGHTS RESERVED.

Contacts

A.M. Best
Peter Walsh, CPA, +1 908-439-2200, ext. 5107
Director,
Corporate Data Management

peter.walsh@ambest.com
or
Christopher
Sharkey, +1 908-439-2200, ext. 5159

Manager, Public Relations
christopher.sharkey@ambest.com
or
Jim
Peavy, +1 908-439-2200, ext. 5644

Director, Public Relations
james.peavy@ambest.com

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