Insights into IFRS and insurance companies

123rf.com

Furthermore, Regulation 27 published under the Act provides financial reporting frameworks for different companies. Most companies are required to adhere to the International Financial Reporting Standards (IFRS).

The International Accounting Standards Board (IASB) recently published the latest standard for the insurance industry, IFRS 17 Insurance Contracts (IFRS 17) which will be effective for financial years starting on 1 January 2021. An insurance contract is defined in the standard as:

• A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.

Since insurance contracts are reliant on numerous assumptions and contingencies, profit and loss is difficult to quantify for many insurers. In addition, some insurance contracts regularly pay out savings to policyholders regardless of whether the insured event occurs. These factors pose challenges for measuring insurance contracts for accounting purposes and reporting on their financial performance.

At the core of financial reporting is the ability for information to be comparable across various entities and jurisdictions to attract investors and assess risk exposure and profitability. The purpose of IFRS 17 is to standardise insurance company reporting frameworks across the globe and increase their consistency, comparability and transparency. In contrast, the previous insurance standard IFRS 4, relied on a myriad of national accounting standards, and also fell short in that it did not reflect a complete view of an entity’s underlying financial position. Consequently, it did not effectively mitigate the potential investors’ risk of obtaining a fair and true view of the company’s financial position and skewed decision making as the analysis of company financials became quite complex and varied.

Some notable changes introduced by IFRS 17:

• the standard creates a consistent accounting framework for insurance contracts within the same group and between other insurance companies;
• companies will be required to provide information about current and future profitability arising from insurance contracts as well as estimates used to measure insurance contracts; and
• the value of insurance contracts will be measured at current value and to reflect estimated future payments to settle incurred claims on a discounted basis. Furthermore, entities will be required to calculate and disclose an explicit risk margin or adjustment in the measurement of insurance contracts.

The introduction of a new standard always brings a risk of non-compliance. When the standard comes into force, failure to comply with these standards inter alia may also result in companies being in breach of their contractual obligations. The responsibility of compliance cannot be fully delegated to the auditors of the company since Principle 5 of the King IV Code on Corporate Governance places a responsibility on boards of directors to set the approach and direction of reporting:

The governing body should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance, and its short-, medium- and long-term prospects.

To mitigate the risks of non-compliance, companies should take the ensuing changes seriously by considering the possible interplay regarding other relevant accounting standards and performing in-depth financial and business impact assessments. Taking such steps may ensure that the full impact of compliance is understood and that processes are put in place to meet the implementation deadline.