Global body introduces new accounting standards for insurers

MANILA, Philippines - The International Accounting Standards Board (IASB) has published the exposure draft on Phase 2 of International Financial Reporting Standard (IFRS) 4 Insurance Contracts. It was issued for general consultation last month, and full implementation of the new standard would likely start in 2011.

If it is embraced by the insurance industry, it will replace the grandfathered generally agreed accounting principles (GAAPs) with a single IFRS for all insurance contracts. To date, insurers have been relying on the GAAP of their individual countries or on elements of US GAAP.

Accounting giant SGV & Co. said that there is a real potential for insurance companies to include IFRS into their wider implementation programs for economic capital management and finance transformation.

SGV partner and head of financial services organization Medel T. Nera said that the IFRS 4 would offer a consistent financial reporting structure for the industry.

“IFRS 4 will create a level playing field for the insurance industry, since it will provide all financial statement users and preparers with greater comparability and transparency about performance as a direct result of consistent measurement and presentation models brought by the standard,” Nera said, adding that it is essential that the industry takes part in a four-month consultation period.

The SGV executive said that implementing the new IFRS standard would be a complex process for insurers. However, with everyone playing by the same rules, implementing IFRS 4 is likely to be a short-term pain for a long-term gain.

Local insurers, investors, regulators and other key stakeholders will have a common process, thus reducing the cost of capital. Take note that many Asian insurers are considering initial public offerings (IPOs) and are expanding domestically or internationally.

Insurers in Asia are expected to face some unique challenges in the implementation of the new international standard. 

SGV partner and Insurance leader Lucy Lim-Chan said that in many jurisdictions the current insurance accounting is based on regulatory reporting requirements and can be quite formulaic. 

“The new IFRS standard will require more sophisticated actuarial modeling, and increased levels of management judgment will need to be applied. But it will help management and shareholders understand the economics and drivers of their business in a way that hasn’t been possible in the past,” Chan added.

For the 120 or so domestic and foreign insurance companies operating in the Philippines, the adoption of the new standard will definitely bring about unprecedented challenges as the current insurance accounting is largely driven by the regulatory requirements of the Insurance Commission.

In anticipation of the new standard, it is imperative that the local insurance industry undertakes some significant preparatory activities early on. A logical starting point will be to obtain sufficient understanding of the provisions of the draft and its implications on the companies’ business, operations and financial reporting.

“As in the past, SGV will be working closely with the local insurance industry and the regulator in this endeavor in the coming months. The industry has to grab this opportunity to participate in the finalization of the new accounting standard through the submission of our local views, analysis and insights during this comment period,” the SGV executive added.

The comment period on the draft ends on November 2010.