To assess the impact of those challenges, KPMG in the U.K. sought the views of 47 insurers in the 'Implementing IFRS in the Insurance Industry' survey conducted in 2006. Respondents represented life, health and general insurance companies in 17 countries.
The survey indicates that considerable work has been done to convert to IFRS but companies feel they have derived little benefit from the effort. Key issues that should be considered in planning for future reporting are:
- Implementing IFRS has increased financial reporting risk due to technical complexities, manual workarounds and management time taken up with implementation.
- More work is required to improve disclosures.
- It may be helpful for companies to view financial statements not from a compliance perspective but as a way of communicating and explaining performance.
- IFRS needs to be embedded further into processes and become 'business as usual'.
- No widely accepted benefits of implementing IFRS emerged. While transparency and comparability were seen by a third of respondents as benefits, only a fifth believed the reporting gave them a better understanding of their business.
- International companies had to increase their resources and do more work than smaller, locally based companies.
Technical accounting challenges ― the insurance related disclosure requirement was a major challenge which respondents found complex to deal with, along with the areas of financial instruments and taxation. The accounting for the newly defined insurance contracts proved a significant challenge.
Impact on financial reporting risk ― two thirds of respondents had increased risk in the reporting process as a result of the increased complexity of technical issues. Manual workarounds added to this risk as did distraction from 'business as usual'. Having to use temporary, untrained staff further added to reporting risk for half the respondents.
Embedding IFRS changes ― a system embedded conversion emerged as preferred practice, especially in general ledger and consolidation systems. In many actuarial departments, however, embedding is limited, requiring manual 'quick fixes'. Embedding IFRS into 'business as usual' remains a challenge.
Impact of announcement of preliminary full-year results ― the IFRS conversion did not affect the timing of the companies’ announcement of preliminary financial results in 80 percent of cases.
Impact on staffing levels ― IFRS conversion has had a staff cost. In half the cases where staff numbers have increased, the resource increase was more than 10 percent. Where staff numbers did not increase, existing staff faced more work.
Alignment of actuarial function ― the need for actuarial resources in the conversion process has been important, particularly for life insurers. Most respondents involved the actuarial function at an early stage in the conversion.
Benefits of implementing IFRS ― although none of the survey’s listed benefits were cited by a wide majority of all respondents, 'transparency' and 'comparability' were sited by more than a third as the major benefit of conversion. Companies did not consider they had obtained better financial information for decision making as a result of the conversion.
Drawbacks of implementing IFRS ― 'complexity of presentation and disclosure' was cited as a major drawback by all respondents. Issues here included data gathering, lengthy accounts, questions over clarity, need for judgment and international logistics. Overall, companies have committed considerable time and money but are unconvinced they have derived any benefit.
Effects on results volatility ― insurance companies’ financial statements may exhibit higher volatility under IFRS than under other accounting policies. IFRS requires fair-value measures for assets and liabilities, which are intrinsically more volatile than previously permitted historical cost measures. Many companies were concerned about this mismatch as it creates an accounting earnings volatility, if not an economic one.
Outstanding post-IFRS implementation areas and potential improvement areas ― complying with other standards while making IFRS 'business as usual' remains a key challenge. IFRS is seen as a compliance challenge not a business or performance improvement opportunity. Using IFRS reported information as management information is not a priority, as the industry is not convinced of its value thus far. However, companies intend to use 'dedicated teams of experts' to address the standards and focus particularly on training staff.
In summary, the implementation of IFRS requires considerable change management effort, particularly in training financial staff and enhancing non-financial staff’s understanding of the reported numbers.
