International Insurance Accounting Standard Wins Investor Support

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By David R. Jones

The pending international accounting standard on insurance contracts will make financial reporting among insurers easier to decipher, investors and other analysts told the standard setter.

International Financial Reporting Standard 17: Insurance Contracts has gained widespread support from investors and analysts, staff of the International Accounting Standards Board said at a July 18 IASB meeting in London.

“Most investors and analysts we spoke to welcomed the improvements in financial reporting transparency and comparability introduced by IFRS 17,” an IASB staff paper drafted for the meeting said.

Insights Into Profits

In particular, investors said, the standard will provide new insights into the sources of profits for long-term insurance contracts.

Overall responses to IFRS 17 indicate that IASB is on the right track, board members Stephen Cooper and Mary Tokar said.

Though some investors and analysts might seek changes to the standard, Tokar said, the board should avoid tinkering with IFRS 17 before it takes effect.

Resistance to Early Changes

“There could be a high level of resistance to changes,” she said, as many investors and analysts have already begun developing models for analysis based on the standard’s provisions.

Board Vice Chairwoman Sue Lloyd said that some participants at the meetings urged IASB to promote greater involvement among those who actually make investment decisions.

IFRS 17, which comes into force Jan. 1, 2019, will replace IFRS 4: Insurance Contracts, an interim standard the board approved in 2004.

“In the context of the lack of consistency among entities applying IFRS 4 in different jurisdictions, those investors and analysts agreed with the need for a comprehensive IFRS Standard for insurance contracts to be applied globally,” staff said.

Multiple Discussions

IASB members and staff conducted 35 discussions with 153 investors and analysts from mid-May 2017, when the standard was published, through early July.

IASB spoke mostly with equity analysts, although discussions also included analysts from credit rating agencies.

Under IFRS 17, an entity must report as insurance revenue the amount charged for insurance coverage when it’s earned, mirroring similar requirements in IFRS 15: Revenue from Contracts with Customers.

“Investors and analysts generally welcomed that the requirements in IFRS 17 for the recognition of revenue are consistent with the recognition of revenue for most contracts with customers in other industries,” according to the staff paper.

Those consulted also lauded provisions in IFRS 17 that:

  •  require entities to identify onerous contracts at initial recognition and in subsequent financial statements;
  •  separate the timing of profit recognition for insurance services in a financial-performance statement from the type of insurance contract provided; and
  •  direct entities to supply enough detail to enable investors and analysts to gauge the impact of insurance contracts on an entity’s financial performance and cash flows.

Concerns About Comparability

Some respondents, though, expressed concerns about comparability.

IFRS 17’s principles-based approach to disclosures about judgments that entities make could make it tougher to compare entities’ financial statements, they said.

In addition, many investors and analysts cautioned that “permitting, but not requiring, a presentation of the effect of some changes in financial assumptions in other comprehensive income could impair comparability between insurance entities,” staff said.

Next Steps

IASB plans to continue soliciting feedback on the standard through 2017, including meeting with investors and analysts who don’t specialize in the insurance industry.

The board in the coming years plans to delve into greater detail during meetings on IFRS 17, although IASB found with IFRS 9: Financial Instruments and IFRS 15 that many investors and analysts wait 12-18 months before a standard comes into force to bone up on its provisions.

IASB said it will take this into account in planning its post-2017 meetings on IFRS 17.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

For More Information

Staff documents prepared for the IASB meeting are available at http://src.bna.com/qTb.

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