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The new international financial reporting standard on insurance contracts will bolster global financial stability, International Accounting Standards Board chairman Hans Hoogervorst said June 29.
Speaking at the annual conference in Amsterdam of the IFRS Foundation, which oversees IASB’s work, Hoogervorst said that companies’ use of differing accounting practices over the past decade have made it tough to compare insurance companies’ financial statements.
In response, the board last month published IFRS 17: Insurance Contracts, which come into force for reporting periods starting on or after Jan. 1, 2021 to replace the current interim standard, IFRS 4.
The insurance industry boasts over $13 trillion in assets, making it a critical part of the global economy, Hoogervorst said—but IFRS 4 allows insurance companies to continue using divergent national standards.
Many of these standards haven’t been updated for years and have substantially differing provisions, he told conference participants.
IFRS 17 will require current valuation of all insurance liabilities using common principles, along with setting clear principles for recognizing revenue and profit.
This will make insurance companies’ financial statements more comparable with each other and with those of their counterparts in the financial services industry, such as banks and asset managers.
“I am convinced that IFRS 17 will contribute to prudence and financial stability,” he said, by providing “much more insight in the risks to which an insurance company is exposed.”
More broadly, the disclosures required under IFRS help serve as the foundation for long-term financial stability by highlighting risks that might otherwise might go unnoticed both by companies themselves and by investors.
By underscoring potential risks, IFRS enables corporate managers to tackle problems as they’re recognized and discourages managers from taking unwarranted risks, he said.
“High-quality accounting gives timely information on onerous contracts, loan losses and the true extent of leverage on the balance sheet,” according to Hoogervorst’s prepared remarks.
IASB has concluded its work on what Hoogervorst called the big four accounting standards covering insurance, revenue recognition, financial instruments, and leases.
The board now is poised to strengthen current IFRS and making other improvements to financial reporting.
“Rather than developing, yet again, major cross-cutting Standards, in the next couple of years we will try to focus more on improving what is already there,” he said.
IASB also will look to enhance the value of primary financial statements, also known as performance reporting, by developing a better structure for company income statements and cash flow statements.
This will include examining whether a need exists for new line-items and subtotals in financial statements, Hoogervorst said.
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Hoogervorst's speech is available at http://www.ifrs.org/news-and-events/2017/06/iasb-chairman-speech-ifrs-17-and-its-contribution-to-financial-stability/
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