IASB commits to IFRS 17 release to combat ‘accounting anarchy’

The International Accounting Standards Board (IASB) has confirmed it expects to publish its new insurance contracts standard, IFRS 17, in the first half of 2017, with chairman Hans Hoogervorst describing the release as coming ‘not one day too soon’

Speaking at  the annual AICPA conference in Washington DC Hoogervorst said the insurance standards project had begun in 1997 to address what he called ‘accounting anarchy’ in the world of insurance’, where using different national GAAP can produce significant differences in revenue, operating income and equity figures.

‘Even for those who know that accounting is not a simple matter of adding and subtracting, this divergence in outcomes is simply shocking. Just about every country in the world does its own thing and it doesn’t look pretty,’ Hoogervorst told his audience.

Hoogervorst also said that some of the accounting practices used for insurance contracts around the world are at odds with what are considered generally accepted – or acceptable - accounting practices for all other sectors of the economy.

For example, many insurance premiums contain a deposit component because many insurance products combine insurance protection with investment. He said that more than a few insurance companies recognise all deposits they receive as revenue. Moreover, premium revenue is often recognised on a cash basis, which is at odds with the general principles of revenue recognition.

The IASB chairman pointed out that IAS 19 requires current measurement of the pension liability, so that the pension liability is continually updated to account for–amongst other things–changes in interest rates. In large parts of the world, however, insurers do not fully update the insurance liability. Often they use historical interest rates.

‘As a result, the devastating impact of the current low-interest-rate environment on long-term obligations is not nearly as visible in the insurance industry as it is in the defined benefit pension schemes of many companies. Clearly, discounting an insurance liability that was incurred 15 years ago at a historical interest rate of five-six per cent does not give relevant information in a time when interest rates are close to–or even below–zero,’Hoogervorst said.

Hoogervorst said the new insurance contracts standard ‘will put an end to these outdated accounting practices’. It will require current valuation of all insurance liabilities, not just life, but also non-life. This will significantly increase comparability between insurance companies and between insurance and other parts of the financial industry, such as banks and asset management.

‘It will be a huge step forward in accounting and it will bring much needed transparency in this very important part of the economy,’ Hoogervorst stated

Looking ahead, Hoogervorst said there are no major cross-cutting standards in development, and the IASB’s focus will instead be on improving what is already there. A specific aim is to improve the communication effectiveness of the financial statements, with the standards body adopting ‘better communication’ as the central theme of its new agenda.

He singled out two issues which will be in the spotlight. The first is the call from investors for more disaggregation of financial information. Secondly, Hoogervorst highlighted concerns over the increase use of non-IFRS alternative performance measures, saying these generally paint a rosier picture of a company’s performance than GAAP.

‘Non-GAAP measures that consistently flatter a company’s performance are probably not the best basis for sound business decisions. Audit and remuneration committees should also be concerned about the increasing use of non-GAAP, usually developed by management itself,’ he said.

As part of the new initiative, IASB plans to take a fresh look at the primary financial statements, aiming to provide more and better structure to the income statement and the cash flow statement. The board will also consider additional line-items and possibly sub-totals, and may decide to create more discipline around the presentation of non-recurring items.

Hoogervorst indicated IASB would also be looking at ways to improve the quality of electronic financial data, given the increasing use of big data and artificial intelligence technology to mine information sets.

‘We will continue to work on the IFRS taxonomy to shore up the reliability of electronic reporting. We also believe that better structuring of the primary financial statements will contribute to the quality and comparability of the information provided by data aggregators. More generally, we will ask ourselves what impact changing patterns of data consumption and provision should have on the way we set standards.’

Hoogervorst’s speech, Safety in Numbers, is here.

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