Ernst & Young has welcomed the publication of the long-awaited exposure draft on phase II of International Financial Reporting Standard (IFRS) 4 Insurance Contracts by the International Accounting Standards Board. Ernst & Young says there is now real potential for insurance companies to include IFRS in their wider implementation programmes for capital management.
The IFRS 4 exposure draft has been a decade in development. Once it becomes a standard in 12 months time, it will replace a confusion of grandfathered generally agreed accounting principles (GAAPs) with a single IFRS for all insurance contracts. To date, insurers have been relying upon the GAAP of their individual countries or elements of US GAAP.
James Dean, Ernst & Young’s global IFRS insurance leader, says: ‘Without doubt, IFRS 4 will create a level playing field for the insurance industry, providing all financial statement users and preparers – from policyholders to investors to analysts, competitors and regulators – with greater comparability and transparency about performance as a direct result of consistent measurement and presentation models brought by the standard. There will be a consistent financial reporting structure for the industry – and this has to be welcomed. The standard has been long-awaited and it is essential that the industry takes part in the critical four month consultation period ahead.
‘Implementing the new IFRS standard is likely to be a complex process for insurers but there will be important milestones to meet in the next few years,’ adds Dean. ‘However, with everyone playing by the same rules in future, implementing IFRS 4 is likely to be a short term pain for a much longer term gain. The benefits to the industry and the wider financial community cannot be underestimated. Insurers will have greater certainty about how their organisation is viewed and evaluated by investors, regulators and other key stakeholders, reducing the cost of capital.’
Insurers are already working to meet the 31 December 2012 Solvency II implementation deadline. At the same time, says E&Y, insurers face increased challenge in communicating their results due to investors’ focus on cash generation, variations in IFRS profit drivers and, for life companies, diversity in embedded value accounting.
David Foster, of E&Y’s EMEIA financial accounting and advisory services group, comments: ‘Insurers will need to work out how they will address the double challenge of implementing IFRS 4 and Solvency II – and for some the triple challenge of moving embedded value accounting forward. If approached in the right way, there is very real potential to streamline financial reporting, regulatory reporting and economic value/ management reporting at the same time.
‘Key performance indicators will change, supporting improved decision making. For many insurers, meeting these challenges head on could act as a catalyst to sort out the current burden of supporting multiple measurement systems and transform their business for the better,’ he concludes.