Quite a few people have asked me where to find the actual re-exposure draft of IFRS4. It seems to be easier to google for it than navigate the ifrs.org website, so here is the link to the page that includes the IFRS4 re-exposure draft background and the exposure draft itself.
A client recently mentioned that they were concerned about the implication that the adoption of Solvency Assessment and Management (SAM) would have on insurance accounting under current IFRS4.
The apparent concern was that measurement of policyholder liabilities for IFRS reporting would change to follow SAM automatically.
Let me start out by saying this is categorically not the case. The adoption of SAM should not change IFRS measurement of insurance liabilities. In this post I’ll cover some of the technical details and common misconceptions of IFRS4 to demonstrate why this conclusion is so clear. Continue reading The Perfect Storm Part 1 – IFRS reporting under SAM
The world of financial reporting for insurers has never been this close to the edge.
There is more change brewing now even than when Europe adopted “European Embedded Values” and later “Market Consistent Embedded Values”. The irony is that Embedded Values may well fall away as a result of the latest change.
So what is changing?
- Solvency Assessment and Management (SAM) is still planned for 2015 in South Africa. SAM will change the calculation of actuarial reserves, or Technical Provisions as they are now known, for regulatory reporting purposes. Solvency II in Europe is now likely to follow rather than precede SAM by a few year, but with nearly identical implications.
- IFRS4, the accounting standard covering insurance contracts, is due for a radical change effective in 2016/2017, although this is years later than originally planned. IFRS4 “Phase 2” as it is referred to throws out most of what we’re used to in terms of profit recognition, financial impact of assumption changes, impacts of asset and liability mismatches and may very well push insurers to value their assets on a different basis.
- IFRS9, a new standard replacing IAS39 and covering financial instruments, whether these are assets or liabilities, will poke and prod insurers into different decisions now and possibly before knowing exactly how IFRS4 will pan out.
- Finally, although this part is still speculative, Embedded Value reporting may fall away as SAM and Solvency II achieve much of the objections of Embedded Value.
This post is the first in a series covering important aspects if the change in financial reporting standards, covering news of the developments as it emerges as well as the likely implications for financial reporting, product design, ALM, financial reinsurance and others. I’d encourage you to post comments or questions on this or later posts and I’ll try to answer those through the series.
- Part 1 – IFRS reporting under SAM
- Part 2 – EV in a SAM/Solvency II world
- Part 3 – Apocalypse! – SAM as the tax basis
- Part 4 – Acquisition accounting under IFRS4 Phase II – a little speculation
So, as I expected given the fundamental changes to IFRS 4 in recent months, the IASB is doing the grown-up thing and is re-exposing the latest version of the insurance accounting standard
later this year early next year.
They are restricting questions to areas that have changed or where final decisions haven’t been made, which I suppose is also fair enough and ensures focus is on the key new areas.
Re-exposure for a period, analysis of comments, reworking of any sections as a result of those comments… There is still a fair amount of work to be done!
Implementation 2016 / 2017 is most likely.