IASB publishes long-awaited insurance accounting standard

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The International Accounting Standards Board has today published what one accounting industry expert is calling a “once-in-a-lifetime regulatory change”, and the IASB says is the world’s “first truly international IFRS Standard for insurance contracts”.

IFRS 17, as the new standard is called, replaces IFRS 4, which was brought in as an interim standard in 2004, and, the IASB says, is designed to help investors and others better understand insurers’ risk exposure, profitability and financial position.

IFRS 17 has an effective date of 1 January 2021, but companies may apply it earlier if they wish.

Until now, IFRS 4 has permitted insurance companies “to carry on accounting for insurance contracts using national accounting standards, resulting in a multitude of different approaches,” the London-based IASB said, explaining the significance of the new standard.

“As a consequence, it is difficult for investors to compare and contrast the financial performance of otherwise similar companies.”

In September 2015, the IASB noted, the Financial Stability Board called attention to the “importance of the board completing the project to replace IFRS 4 with a new Standard”.

The new accounting standard will be adopted by the 126 countries that officially use the International Financial Reporting Standards (IFRS Standards) as their official financial accounting system, to be used by listed companies as well as any other financial institutions that are required to make their balance sheets public.

This means it won’t automatically be adopted by insurance companies in the US, which has yet to adopt the IFRS, in spite of years of discussions aimed at “converging” its accounting standard, known as US GAAP (“Generally Accepted Accounting Principles”) with the IFRS standard.

However, a spokesperson for the London-based IFRS Foundation, which promotes the adoption of the IFRS Standards and which is also the oversight body of the IASB, said the US’s Financial Accounting Standards Board is “also  updating its standards, [of which] they have more than one, for insurance”, and that its officials are in the process of consulting on proposals now.

“They will not adopt our standard, but the direction of travel, and the underlying philosophy, is similar for both boards – to move to using current information.”

The IASB is in charge of the actual setting and maintaining of the IFRS’s standards.

In a statement today, the IASB  said it is prepared to help those looking to implementing the new insurance standard by establishing a “Transition Resource Group”, for which it is currently soliciting members. 

It has also prepared a 3-minute You Tube video, featuring the IASB chairman, Hans Hoogervorst,  discussing aspects of  IFRS 17, and an “infographic” on the new standard,  which contains such facts as the fact that curently, some 450 listed insurers employ the IFRS Standard when preparing their accounts.

‘Once-in-a-lifetime change’ 

Among those commenting on the new insurance accounting standard today was Francesco Nagari, the Hong Hong-based global IFRS insurance leader at Deloitte, the ‘Big Four’ accountancy firm.

He said the publication of IFRS 17 marked “a once-in-a-lifetime regulatory change in accounting for insurance policies”.

“The new rules aim to bring greater transparency in the financial reporting of an industry whose accounts have often been labelled as a ‘black box’,” he added.

“A single accounting language for insurers should aid comparability across countries where currently various national practices apply.”

However, he went on, “to implement IFRS 17 will take substantial effort. The measurement of insurance liabilities will reflect market interest rates and the impact of policyholders’ guaranteed benefits.”

He noted that the extra effort needed, including implementation costs that for many insurers would be “as large as those incurred in the European Union for the adoption of the Solvency II regulations”, which have been estimated at between €3bn and €4bn for the EU insurance industry as a whole, was likely to be greatest for life insurers, compared with general insurers.

The Association of British Insurers director of regulation, Hugh Savill, was measured in his comments.

The standard “will significantly change how insurers report their financial results from 2021, [but] has been subject only to limited operational testing, and its ability to support adequate communication with the market has not yet been evaluated”, he noted.

“Some key requirements have recently been developed, and insurers have previously signalled concerns which have not been met.

“Further, the implementation cost and effort are likely to be substantial, as the industry’s recent experience with Solvency II has shown.

“Looking ahead, the industry will engage in the cost-benefit/public good assessment that is central to the endorsement process for the use of IFRS 17 in the EU.

“We also need an equally robust endorsement process in the UK once we have left the European Union.”

As reported, Saudi Arabia moved to adopt the IFRS standard last year, becoming the 120th jurisdiction to do so, in what was seen as part of a wide-ranging effort on the part of the country’s government to build its non-oil-dependent economy, known as Saudi Vision 2030.

The effort to create a global accounting standard dates back to 1973, when a  group of countries got together to form what they called at the time the International Accounting Standards Committee, with the aim of creating a single, globally-recognised definition for such terms as revenues, depreciation, interest receivable and book value.