Today the International Accounting Standards Board (IASB)
released the Exposure Draft of the IFRS on insurance contracts.
This document follows on from the draft IFRS published in
2010. FASB is still in the process of drafting their
insurance accounting proposals and is expected to issue an ED
shortly.
The exposure draft includes the full text of the proposed standard
with the amendments that the IASB has made to its previous draft as
a result of the feedback received from its constituents. The
changes are limited to a number of areas and it is only on those
that the IASB has asked questions. The rest of the draft IFRS is
deemed final following the due process to date. The IASB has
retained its 2010 ED proposal for a single accounting model using a
"building blocks" approach for all types of insurance
contracts. This approach requires insurers to measure insurance
liability by reference to these three building blocks: (a)
probability-weighted expected cash flows, (b) risk adjustment
liability, and (c) a residual liability representing the unearned
profit for the contract, technically termed as the 'contractual
service margin'.
The IASB is seeking feedback on the following key issues:
- measurement proposals (adjusting the unearned profit to reflect changes in cash flows for future services / measuring and presenting cash flows from contracts with contractual link to underlying items);
- presentation proposals (presenting information on insurance contract revenue / presenting the effects of changes in the liability due to discount rates changes in OCI); and
- approach to transition (apply standard as if always effective / some simplifications and relief provided).
This exposure draft will be followed by the final standard which
is expected to be issued in H2 2014, with a proposed effective date
to be approximately three years from the publication of the final
IFRS. However, early application is likely to be permitted and
comparative information will need to be restated.
The proposed changes will impact the insurance industry more than
any previous changes in financial reporting for insurers.
Insurers should use the exposure draft to assess the potential
implications for their business, looking specifically at how their
profit profile, data, systems and market communications may have to
adapt.
This is the first step in the long road to implementation ahead,
so insurers will need to take action now to achieve a smooth
transition and to prepare investors for the new reporting
basis.
Click here to read the Exposure Draft and comment letters.
Francesco Nagari
Francesco is Deloitte's Global IFRS Insurance Leader. He
combines extensive IFRS expertise in the field of insurance
accounting and capital regulation with international industry
knowledge and practical experience on the other issues that affect
insurers' financial and solvency reporting.
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