Insurance Accounting Proposals

The recent proposals by the International Accounting Standards Board for a new accounting model for insurance contracts have been generally welcomed by tax experts, although much work lies ahead if the far-reaching plans are to be implemented properly.

The IASB published the Exposure Draft (ED) of the new International Financial Reporting Standard (IFRS) for insurance contracts on July 30, and the publication proposes fundamental changes to the financial reporting of insurance companies applying IFRS, with a goal of making it more consistent and transparent than it has been so far.

"Given the increased adoption of IFRS worldwide, it is no exaggeration to suggest that this proposed accounting standard would have a global impact and could fundamentally change the way insurance companies measure, report, and evaluate performance of their insurance contracts,” said Joel Osnoss, Global IFRS Leader, Clients & Markets, Deloitte Touche Tohmatsu.

“Many insurance companies would experience a significant amount of change in their financial statements and would need to modify their information systems, risk management programs, and possibly even product design. There would also be a need for education of stakeholders, including shareholders, policyholders, analysts, and more. In the end, the hope is for consistency, comparability, and transparency across insurance companies operating in different jurisdictions around the globe," Osnoss added.

The IASB says there will be a four-month comment period on the ED, with the final standard due for publication in 2011. The mandatory application will be decided after the comments have been received, and it will be at the earliest from January 1, 2013 when the other major change on investments accounting becomes effective. However, the IASB is prepared to delay the implementation date of the two projects in parallel if necessary.

KPMG concurs that arriving at common requirements is likely to have "a significant impact" on the insurance industry, considering the current diversity under IFRS in accounting practices in different areas of the world.

"Given the significance of the proposals to an insurer's financial statements and the challenges that can be expected in implementing them around the world, particularly to insurers writing long-term products as well as insurers operating globally and in emerging markets, we support the Board's further consideration of an appropriate effective date," notes Frank Ellenbuerger, KPMG's global insurance sector leader and partner in the German firm.

"There is undoubtedly a significant amount of technical information to digest," adds Danny Clark, Head of Insurance Accounting at KPMG in the UK, "but as insurers work through the detail they should begin to identify the systems, data and process areas impacted by this proposed accounting change together with the likely broader business and people impacts to derive a plan to address these matters in a way that meets likely adoption timelines.”