The lack of a common approach to accounting and financial reporting within the insurance sector renders many insurers’ financial statements unrepresentative and confusing – an issue of increasing significance as the industry globalizes.
In the second half of 2010, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) both published proposals designed to create a common approach to financial accounting and reporting.
Since then, both boards have been busy working through industry feedback on their proposals. Limited IASB and FASB re-exposure documents are expected in the second quarter of 2013. The effective date of the final IFRS is expected to be approximately early 2018. Stay informed of the updates through KPMG's IFRS Insurance Newsletter.
Challenges for insurers
The boards’ are proposing that measurement of insurers’ assets and liabilities fluctuate with market movements and changes in estimate – volatility insurers’ fear may deter investors and increase the cost of capital.
In response to industry feedback, the boards revised their proposals, allowing an ‘other comprehensive income’ (OCI) category on both sides of the balance sheet – both for presenting changes in fair values of financial assets and for presenting the changes in insurance liabilities arising from discount rates.
This two-sided OCI approach goes some way in removing volatility from profit or loss.
However, it also results in accounting mismatches in equity and/or profit or loss – depending on how the insurer classifies its assets and how effectively an insurer matches its assets and liabilities durations and hedges its exposures.
Reporting of financial instruments – recent developments
Meanwhile, both the IASB and the FASB have been working to improve their standards for reporting, classifying and measuring financial instruments.
The IASB’s proposal – IFRS 9 Financial Instruments – is scheduled to take effect 1 January 2015. In November 2012, the IASB issued an exposure draft on limited amendments to IFRS 9. Developments continue on hedge accounting and an impairment model for financial assets. The IASB plans to publish a new draft for an impairment model that results in earlier loss recognition. The amendments for hedge accounting are to be published during 2013.
These developments support the building of more effective and integrated approaches to solvency supervision at a global level. Insurers and their regulators will want to prepare to comment on the limited re-exposure of the IASB’s proposals later this year – and start preparing for IFRS 9 Financial Instruments.