What is Assurance
Assurance refers to financial coverage that provides remuneration for an event that is certain to happen. Assurance is similar to insurance, with the terms often used interchangeably. Insurance refers to coverage over a limited time, whereas assurance applies to coverage for extended periods or until death. Assurance may also apply to validation services provided by accountants and other professionals.
BREAKING DOWN Assurance
One of the best examples of assurance is whole life insurance as opposed to term life insurance. (In the United Kingdom, "life assurance" is another name for life insurance.) The adverse event that both whole life and term life insurance deal with is the death of the person the policy covers. Since the death of the covered person is certain, a life assurance policy (whole life insurance) results in payment to the beneficiary when the policyholder dies.
A term life insurance policy, however, covers a fixed period, such as 30 years, from the policy's purchase date. If the policyholder dies during that time, the beneficiary receives money, but if the policyholder dies after the 30 years, no benefit is received. The assurance policy covers an event that will happen no matter what, while the insurance policy covers an incident that might occur (the policyholder might die within the next 30 years).
Assurance as Professional Services
Assurance can also refer to professional services provided by accountants, lawyers, and other professionals. These professionals assure the integrity and usability of documents and information produced by businesses and other organizations. Assurance in this context helps companies and other institutions manage risk and evaluate potential pitfalls. Audits are one example of assurance provided by such firms for businesses to assure that information provided to shareholders is accurate and impartial.
Example of Assurance Services
As an example, investors of a publicly traded company may grow suspicious that the company is recognizing revenue too early. Early realization of revenue might lead to positive financial results in nearby quarters, but it can also lead to worse results in the future. Under pressure from shareholders, the management of the company in question agrees to hire an assurance firm to review its accounting procedures and systems and provide a report to shareholders. The summary will assure shareholders and investors that the company's financial statements are accurate and revenue recognition policies are in line with generally accepted accounting principles (GAAP).
The assurance firm reviews the financial statements, interviews accounting and other department personnel, and speaks with customers and clients. The assurance firm makes sure that the company in question has followed GAAP and assures stakeholders that the company's results are sound.