As part of an effort to address issues raised around its previous proposals, the International Accounting Standards Board put forth a revised exposure draft on insurance contracts last week.
“The proposals aim to mitigate the potential for earnings volatility, bring consistency and a better understanding of how companies account for insurance contracts,” David Foster, a partner and insurance finance and accounting leader at advisory services provider Ernst & Young, said. “However, these proposals also bring potentially significant operational challenges and introduce more complexity.”
The proposal put forth by the IASB last Thursday retains features of the original proposal put forth in 2010.
Under the revised proposal, a single accounting model would be required for all insurance contracts and would be applied at portfolio level using a current-fulfillment-value approach. The contractual service margin would be adjusted for changes in assumptions related to future services and coverage, components of interest expense would be separate and insurance contracts linked to cash flows would use the carrying amounts of underlying items to account for cash flows.
Additionally, the definition of insurance revenue and expenses would be revised under the proposal, and first-time adopters of the new standard would use a transition method based on a retrospective or modified retrospective approach.
“Companies will need to look at the proposed model for insurance liabilities in the context of the broader, shifting reporting landscape,” Foster said. “When considered alongside other financial and regulatory reporting changes, and continuing economic and cost pressures, the challenge for finance functions in the coming years will be substantial. While the effective date of a final standard is unlikely to be before 2018, the work needed to prepare should not be underestimated.”
Richard Lynch, the chairman of EY Global Insurance Technical, said the proposal may be the last opportunity for insurers to comment, adding that firms “need to understand the impact on financials and business operations to provide effective feedback.”
“If all goes well, we hope to see the final standard in 2014,” Lynch said. “And while the IASB has responded to the industry’s requirement to allow ample time to implement, companies will need to take advantage of the ‘run up’ to effectively assess and plan for the changes ahead. In our view, insurers should start looking at the implications now.”