Number Crunch

Insurers are now at a critical point in the timetable for adoption of the International Financial Reporting Standards (IFRS). Companies should now be taking steps to evaluate the impact of IFRS on their 2004 results if they are to meet the 2005 implementation deadline for the standards. IFRS is the product of EU legislation seeking to make accounts more consistent and transparent between countries. The idea is that it should allow for a better comparison of the accounts of companies in different states, and a greater understanding of the accounts themselves. This should enable investors to gain a better understanding of the returns they are getting.The use of IFRS is mandatory for companies listed on any EU stock exchange for December 2005 year-end results. This also means that six-month interim results at June 2005 must be prepared under IFRS, with appropriate comparatives from 2004 figures.

Evaluate impactInsurers currently preparing their June 2004 interim results, or planning for the 2004 year end, need to evaluate the impact of IFRS on their numbers now. If they don't do this they will struggle to meet the deadlines in 2005.If this wasn't a strong enough imperative for action now, businesses should be aware of the recommendations of the Committee of Securities Regulators (CESR). The CESR says that companies should aim to quantify the positive and negative impact of change to IFRS in 2004 financial statements. If this is not possible at the time of announcing the 2004 results, then explanatory disclosure should be given.The FSA has indicated that it will regard the CESR recommendations as good practice, but not mandatory in the UK. Over the coming months there will be a lot of attention on companies' progress in applying IFRS and the impact on their results. In practical terms what should an insurance business be doing now to evaluate the impact of IFRS on its position and results?IFRS 4, the standard for insurance contracts, has been the main area of focus for insurers. This was published in April and is intended to be a temporary standard, a stop-gap until the International Accounting Standards Board (IASB) develops a comprehensive insurance contracts accounting standard in the second phase of its insurance contracts project.IFRS 4 provides a substance-based definition of an insurance contract, temporary dispensations from certain standards for insurance contracts, guidance on implementing current standards not covered by the dispensations, and extensive disclosure requirements.For insurance contracts meeting the substance-based definitions, the dispensations within IFRS 4 mean that a change in the basis of accounting from UK GAAP is not required. Most UK general insurance business should be expected to meet the insurance contract definition in IFRS and hence qualify for these dispensations. Businesses would be expected to conduct some form of review of the contracts they write (and the reinsurance they purchase) and then be able to conclude that no change in accounting is required in the majority of cases.

Insurance definitionOne area where a change in accounting may be required is for financial-type reinsurances where financial components of the contract will need to be 'unbundled'. It will be rare for general insurance contracts not to meet the insurance definition and so for the majority of businesses, major systems changes should not be required to meet IFRS 4.The additional disclosure requirements of IFRS 4 will also take up general insurers' time. IFRS 4 requires extensive disclosure of the key risks and sensitivities in the business and the impact of critical reserving judgments. Both qualitative and quantitative measures are required, with the impact of changes in assumptions and major exposures clearly laid out. Simple 'boiler-plate' disclosures would seem to be unacceptable, the aim being to portray the business through the eyes of management.There will no doubt be much discussion as to the form and content of appropriate and adequate disclosure (which should run to several pages), but at least, thankfully, an exemption means that no comparative amounts are required in the first year.Perhaps the majority of time for the accounts department of general insurance businesses in the preparation for IFRS will be spent on the other international standards. It should not be forgotten that IFRS 4 is not a standard for insurance businesses; it is a standard for insurance contracts only.

Foreign exchangeUnlike UK GAAP, where the ABI SORP deals with accounting for matters such as investments and foreign exchange, insurers applying IFRS will have to apply the same standards as other businesses in dealing with their accounts. For example, under IAS 39, investments will have to be valued at bid price, rather than mid-market price, and insurers will have to apply the full financial instrument disclosure requirements of IAS 32. Investment properties will fall under the more onerous requirements of IAS 40, which prohibit owner-occupied properties from investment accounting. These are just two of the areas where accounting may have to change. If one adds to this the recently introduced requirement for accounting for share and option schemes at fair value and the changes in accounting for acquisitions and goodwill, then the impact on an insurer's results could be significant.Even without significant change to the underlying basis of accounting for the majority of general insurance contracts, then there is still a significant amount to be worked through over the coming months.