Europe: Accordant accounting

The International Accounting Standards Board‘s recent publication of its revised exposure draft of proposals for the accounting for insurance contracts, takes the insurance industry another step closer to achieving greater consistency in the way insurers report their results.

"Insurers now have less than four months to respond to the exposure draft."

As most analysts will confirm, understanding and comparing the results of insurance companies and their underlying performance based on current financial reporting is not easy. One of the aims of introducing a consistent basis for accounting for insurance contracts is to make it easier for investors, and other key users of financial statements, to better understand the results and financial position of insurance companies, providing a better comparability across companies and across geographies. However, we only need to look at the history and time taken in developing the proposed standard thus far to appreciate that there are no quick fixes.

Hot topics

Insurers now have less than four months to respond to the ED, and well considered feedback will be crucial if the new standard is to achieve in practice the theory and original objectives that lie behind it. The IASB is seeking to avoid unnecessary delays by not re-opening topics it believes have been sufficiently deliberated, but a number of hot topics remain.

The intent to standardise accounting and reporting for insurance contracts was first raised in 1997 by the IASB's predecessor, the International Accounting Steering Committee, and discussions and development of proposals have been underway ever since. But the latest ED clearly demonstrates the level of effort the IASB has put in to address industry's concerns around the practical implementation and application of previous proposals published in 2010.

Limited feedback

In addition, the IASB is now seeking to speed up the process by limiting the remaining topics open for comment and asking the industry to respond to specific questions around a number of limited areas of the proposals, one of which includes a question on the overall cost benefit of implementing the proposals. Despite this, there remains a great deal of debate in the industry around a number of the proposals and full consensus on all aspects is unlikely.

Topics such as the use of other comprehensive income to reflect movements in discount/interest rates, treatment of participating contracts (with profits) and the presentation proposals, in particular, are likely to continue to give rise to much ongoing discussion.

Last chance

The timelines are still uncertain but this year may be insurers' last chance to comment If all goes to plan, a final standard would be issued by early 2015 and the IASB has committed to allow ample time for the industry to prepare and get ready, and so implementation is unlikely to be before 2018.

However, as we all know this is not the only new accounting and reporting change that insurers are having to deal with over the next few years, with IFRS 9 (changes to accounting for Financial Instruments) and of course Solvency II also on the near horizon.

Fiscal responsibility

Much of the responsibility to meet these new accounting and reporting requirements will fall to the chief financial officer and their finance departments but implementation efforts will draw on resources across the organisation. When considered in conjunction with the ongoing pressure for finance to improve and provide better and more insightful management information, whilst keeping the relative cost of finance functions down, the implementation challenges are potentially enormous. The synergies and differences across all these reporting changes therefore need to be carefully considered and working out the chronology and the most efficient ways to start work is not easy.

"Regardless of when organisations start working on their own insurance contracts project, insurers do need to make themselves familiar with the ED now."

Insurers are currently facing a difficult decision on when to start any serious activity around the ED; start too early and costs may be wasted on a proposed standard that is still moving; leave it too late and it becomes more challenging to align and leverage existing work such as Solvency II in turn leading to more cost and the risk of tactical solutions and workarounds.

Regardless of when organisations start working on their own insurance contracts project, insurers do need to make themselves familiar with the ED now as this is probably the last chance for the industry to comment on the proposals. It is in the interest of the whole insurance industry to consider the ED carefully and make sure they feed back on the key areas requested by IASB, including overall effects and cost benefit of implementation,before the 25 October 2013.

David Foster, partner and insurance finance and accounting leader, Ernst & Young