Value Relevance of Embedded Value and IFRS 4 Insurance Contracts

Rebecca Chung-Fern Wu () and Audrey Wen-Hsin Hsu ()
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Rebecca Chung-Fern Wu: Department of Accounting, National Taiwan University, Room 1001, 85 Sec. 4 Roosevelt Road, Taipei, Taiwan 106, Taiwan.
Audrey Wen-Hsin Hsu: Department of Accounting, National Taiwan University, Room 1001, 85 Sec. 4 Roosevelt Road, Taipei, Taiwan 106, Taiwan.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2011, vol. 36, issue 2, 283-303

Abstract: In light of the recent exodus of foreign insurers from Taiwan and the local insurers’ outcries against the International Financial Reporting Standard (IFRS) 4 Insurance Contracts, we examine the value relevance of financial statements for life insurance firms, with particular interests to the embedded value (EV) disclosure. We find that the EV of equity has an incremental information role for book value of equity, which indicates that the accounting mismatching problem in the insurance industry creates a demand for fair value accounting. The fair value of liabilities under IFRS 4 Phase 2 has been disputed globally by accountants, actuaries, academia and regulators. The EV model is a concept approaching the fair value model. The research findings provide important empirical evidences supporting the fair value concept of IFRS 4.

Date: 2011
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