News
The Impact of Accounting Changes on Regulation
30-Nov-2016
Business Mirror
Copyright © 2016. Business Mirror
Philippine
accounting
In December 2015- the IASB responded to these potential (the impact of accounting changes on regulation) issues by proposing amendments to the existing IFRS 4. The exposure draft ED/2015/11 Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts proposed:
Temporary exemption from applying IFRS 9 for certain entities that issue contracts in the scope of IFRS 4 (the deferral approach).
Exclusion from profit or loss of the difference between the amounts recognized under IFRS 9 and IAS 39 Financial Instruments: Recognition and Measurement for specified assets relating to insurance activities (the overlay approach).
The overlay approach aims to address insurers' concerns about temporary accounting mismatches and volatility in profit or loss, but would not address the concern of implementing two significant accounting changes within a short period of time. The deferral approach addresses this concern for eligible entities.
Entities will be permitted to defer the application of IFRS 9 for annual reporting periods beginning before January 1, 2021, (or application of the new insurance contracts standard if earlier) if its activities are predominantly related to insurance and it has not previously applied IFRS 9. These activities include issuing investment contracts measured at fair value through profit or loss or FVTPL under IAS 39 and issuing contracts in the scope of IFRS 4. An entity will be required to assess the eligibility based on the ratio of liabilities arising from these activities plus 'other' liabilities that are connected to those activities compared to the entity's total liabilities. An entity's activities would be deemed predominantly related to insurance only if the ratio is greater than 90 percent; or if the ratio is above 80 percent but less than or equal to 90 percent and the entity can offer evidence that they do not have a significant activity that is unrelated to insurance.
For the first time, the forthcoming insurance contracts standard will require consistent accounting for insurance contracts, providing the ability to analyze results more meaningfully across entities and jurisdictions. The standard will be one of the most complex standards issued by the IASB and its implementation will reflect this, particularly for those insurers that issue long-duration insurance contracts.
Some of the related impacts include:
The measurement model will change the way insurance liabilities are measured and presented.
Due to the even release of the CSM, earnings patterns may change, especially for long-duration contracts. For many contracts, earnings (and, hence, the creation of capital) will arise later compared to both Solvency II and market consistent embedded values. However, for other contracts, such as regular premium contracts with participation features, the recognition of earnings may be accelerated.
The level of aggregation used for measuring the CSM and for determining when contracts are onerous will influence an entity's profit profile (and, hence, the creation of capital)
A reduction in equity may occur on transition and in subsequent periods, impacting reported capital.
Volatility may increase for entities that have not previously measured their insurance contracts using current information and assumptions. Although various accounting options are expected in the forthcoming insurance contracts standard, it remains unclear precisely what effect these options will have on reducing volatility in profit or loss.
Calculating and releasing the CSM, both at transition, and subsequently, will present a new operational challenge.
The new measure of insurance contract revenue and the presentation of other comprehensive income, or OCI, will represent a significant change to current practices and the metrics utilized by analysts and other users of financial statements, such as regulators and supervisors.
Significant effort and investment may be needed to develop, test and operationalize new processes and controls to implement the forthcoming insurance contracts standard. Systems may need upgrading, for example, to ensure that they can handle the new requirements to collect and store data and track the CSM.
The forthcoming standard will require significant changes on the part of both preparers and users of insurers' financial statements.