New IASB standard will trigger shift in reporting
This standard represents the most significant change to insurance accounting requirements in 20 years.
KUCHING: The International Accounting Standards Board (IASB) has issued a new insurance contracts standard, International Financial Reporting Standard (IFRS) 17 Insurance Contracts which will trigger a landmark shift in the financial reporting of insurers under IFRS, and marks a fundamental change to current practice across the industry.
The IASB’s objective in introducing the new standard is to increase transparency in insurers’ financial statements of life, non-life, direct insurance and re-insurance. Insurers providing long-term contracts will be most affected.
EY in a statement yesterday said the new standard will require insurers to provide a balance sheet valuation of their insurance liabilities that combines a measurement of the expected probability weighted future cash flows based on updated assumptions, with the recognition of profit over the period that services are provided under the contract.
“This standard represents the mostsignificantchangetoinsurance accounting requirements in 20 years.
“In line with the IASB’s stated intention to provide greater consistency in financial reporting, the insurance industry will now have to change the way in which insurance liabilities are measured, while also providing far higher levels of disclosure compared to existing financial reporting processes,” EY Global Insurance Finance, Risk and Actuarial leader Martin Bradley said.
“These changes will coincide with other changes to the reporting for financial assets under IFRS 9 Financial Instruments, and will potentially bring more volatility in reported profit.”
The effective date of Jan 1, 2021 willgiveinsurersanimplementation period of around three and a half years after issuance of the standard.
While the IASB has stated that the implementation period is relatively long compared with other standards, the complexity of IFRS 17 will be such that companies will need to start preparing for implementation very soon, as insurers will be required to estimate historical amounts when transitioning to the new standard.
“The new requirements will make the understanding of reported profit and how it has moved between reporting periods more challenging. While the standard will not become effective for a few years, the impact is likely to be felt much sooner by insurers.
“Investors are likely to ask for expected impacts ahead of the implementation date, and the decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability,” EY Asia-PacificIFRS17Implementation leader Martyn van Wensveen said.
“Understanding the commercial, financial and operational impact of IFRS 17, and reconciling reported results and equity with the equivalent numbers computed under local regulatory and other reporting frameworks ( like Embedded Value) will be important. New systems and processes will have to be built to produce and report the numbers, and metrics for steering the business will change.
“This is important as the new published numbers may be telling a different story from what Asian insurers have been telling the market before. Ultimately, the implications of IFRS 17 will go well beyond the reporting function and affect many parts of the organization.”
EY’s Malaysia Assurance partner and Insurance leader Brandon Bruce Sta Maria added that the local regulator, Bank Negara Malaysia, has also initiated dialogues with and sought feedback from the local insurers in Malaysia on their plans to adopt the standard, clearly showing its concern about the potential significant impact that the standard may have on insurers’ operations and financial reporting considerations.
EY