On 30 July, the IASB published its Exposure Draft of the new IFRS for insurance contracts. This is a major milestone in the creation of an improved reporting standard for insurance under International Standards. Preparation for the new IFRS will require significant investment and the detailed assessment of the new proposals will be a key step in what is expected to be a complex implementation challenge. It is hoped that the benefits of these efforts will bring more consistency and transparency to insurance reporting than there is under the current IFRS regime, which in turn should enhance insurers’ ability to raise capital.
The Insurance Accounting Newsletter provides a monthly update on the development of the new accounting requirements and a summary of Deloitte’s own understanding of the progress being made by the Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB).
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.”
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.”
IFRS: Insurance Accounting
2009 has seen some very significant progress in the development of an insurance accounting framework. In late 2008, the US based Financial Accounting Standards Board (FASB) joined the "Insurance Project" established by the International Accounting Standards Board (IASB). Both organisations have been working together to establish a reporting standard for insurance companies that may well prove to be the first truly global GAAP for insurance.
Insurance company reporting is currently governed by Phase I IFRS4, a temporary standard pending a fuller Phase II standard. This presentation covers:
The development of IFRS for insurance companies
Recent developments
The converging positions of FASB and IASB that may lead to a joint Exposure Draft in March or April 2010, and a final standard by June 2011
Implications of these IFRS developments for insurance companies.
Insurance company reporting is currently governed by Phase I IFRS4, a temporary standard pending a fuller Phase II standard. This presentation covers:
The development of IFRS for insurance companies
Recent developments
The converging positions of FASB and IASB that may lead to a joint Exposure Draft in March or April 2010, and a final standard by June 2011
Implications of these IFRS developments for insurance companies.
Free Cash to Earnings Ratio.
Calculate as (Free Cash Flow / Net Income). A big red flag is when this is consistently less than 100%. We will discuss this more in the red/green flag articles.
Now, we have a working explanation of all three financial statements that all public corporations report to the SEC. Next, we'll look at 10 red flags to look for when examining these statements.
Now, we have a working explanation of all three financial statements that all public corporations report to the SEC. Next, we'll look at 10 red flags to look for when examining these statements.
Free Cash Flow Margin.
Calculate as (Free Cash Flow / Revenues). This is the amount of every dollar of sales that is converted into free cash flow. The higher the better here. Look for at least 5%. Intel's very high 21% figure is just another indication of the top quality nature of the company.
Free Cash Flow
Free cash flow can be calculated two ways. Classically it's (Net Cash from Operations + Depreciation - Capital Expenditures). MagicDiligence, and Joel Greenblatt in The Little Book that Beats the Market, calculate it as (Net Cash From Operations - Depreciation). Free cash flow is the cash available for the company to invest in growth or pay back to shareholders through share buybacks or dividend payments. MagicDiligence uses depreciation as this is a more accurate view of "maintenance capital expenditures". The traditional calculation can include capital expenditures used for growth (for example, buying new property or buildings), which unfairly skews the free cash flow calculation for quickly growing companies.
Net cash provided (used) by financing activities
Net cash provided by financing activities also known as Total Financing Cash Flow it's the sum of the issuance of stock, issuance of debt, the repayment of long-term debt, the payment of cash dividends to stockholders and other financing charges.
Net cash provided (used) by investing activities
Net cash provided by investing activities also known as Total Investing Cash Flow it's the sum of the sales of property, plant and equipment; purchases of property, plant and equipment; sale of short-term investment; purchase of short-term investment and other investing activities.
Net cash provided (used) by operating activities
Net cash provided by operating activities also known as Total Operating Cash Flow shows the amount of cash a company raise from its regular operations. Investors should look for positive cash flow and grow steadily every quarter and year.
Non cash Activities
Significant financing and investing activities that do not affect cash are not reported in the body of the statement of cash flows. Examples of significant non cash activities are: (1) Issuance of common stock to purchase assets. (2) Conversion of bonds into common stock (3) Issuance of debt to purchase assets. (4) Exchanges of plant assets.
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