Keep it simple."A Gap in Insurance GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ?" (JofA, Mar.05, page 83) is a very nice article-really clever, perhaps even brilliant. But therein is its difficulty. It adds a lot of complexity to the process of valuing a life insurance policy for little return--probably insignificant in any one entity. How much difference does it really make? What would the calculations cost? Would we need to hire an actuary actuary One who calculates insurance risks and premiums. Actuaries compute the probability of the occurrence of such events as birth, marriage, illness, accidents, and death. ? If the result were significant, it probably would be in a closely held company Closely held company A company who has a small group of controlling shareholders. In contrast, a widely-held firm has many shareholders. It is difficult or impossible to wage a proxy battle for any closely-held firm. . There the cost of compliance is an unneeded burden. It would not improve, but distort the financial picture for such a company's business purposes. Would its lenders rely on capitalized payments as the policy value or would they insist on cash value? If the company were sold, would the buyer pay for it, or would we have another set of special-purpose statements to prepare? In considering the probability of a payoff using life expectancies Life Expectancy 1. The age until which a person is expected to live. 2. The remaining number of years an individual is expected to live, based on IRS issued life expectancy tables. , the article ignores all the other contingencies. If the policy is discontinued dis·con·tin·ue v. dis·con·tin·ued, dis·con·tin·u·ing, dis·con·tin·ues v.tr. 1. To stop doing or providing (something); end or abandon: , I imagine recognizing a loss for the difference between premiums paid and cash value received. There are many ways it might be discontinued--retirement, disability, quitting or the company's being sold. Conclusion: The payoff isn't really very likely. Putting it all together, let's leave things as they are. The simplest solution is usually best, and in this case it would provide a more realistic picture of a company's condition than the methods proposed. Michael D. Woods, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Kerrlersville, N. C. |
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