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Impacts of IFRS Accounting changes


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Step through the likely impacts of IFRS 4 and IFRS 9, both of which have complexities that will require careful planning and execution.

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Impacts of IFRS Accounting changes

  1. 1. +44 (0)20 3753 5343 Chief Technology Office Mark Sherwood – Finance Enterprise Architect 14June 2016 Impacts of IASB Accounting Standard Changes under IFRS 4 (Phase 2) and IFRS 9
  2. 2. +44 (0)20 3753 5343 IAS 39 is the current standard that deals with the recognition and measurement of financial assets and liabilities as well as some non-financial items. IASB projects are underway to introduce a number of changes in the form of new standards which will replace IAS39. The new standards are likely to have some significant impacts and will require careful consideration and planning.. IFRS9 Financial Instruments Following the financial markets turmoil of 2008 it was observed that losses against assets arising from the crisis did not filter through in a timely manner and may also have exacerbated the scale of the crisis. The new standard, which will be implemented in January 2018 brings changes to the recognition and accounting of assets, expected¹ loss credit impairment, as well as updating (but not replacing) some Hedge accounting rules. IFRS 4 Phase 2 – Insurance Contracts IFRS 4 was first introduced in 2005 but the latest draft changes under Phase 2 are unlikely to be implemented much before 2020². Dealing with insurance contracts (i.e. liabilities) these changes are likely to be technically challenging. Both IFRS4 P2 and IFRS 9 are likely to be resource heavy requiring significant investment around processes as well as Actuarial & Finance system changes. Note¹ - current reporting is on an actual loss basis so moving to an expected loss (i.e. forward looking) model is a major shift. Note² - lack of convergence between implementation dates likely to create a volatility in the underlying statements Background
  3. 3. +44 (0)20 3753 5343 The following diagram illustrates the high level activities that feed both regulatory and financial reporting processes. The new IFRS Financial Reporting requirements are significantly different from Solvency II Regulatory Reporting, therefore major changes are likely to be required which will impact :  Requisite Inputs and Outputs  Systems & Processes  Management Information  Financial Reporting  Internal Controls  Staff (including management) training Operational Impacts
  4. 4. +44 (0)20 3753 5343 The high level data types, categories and particularly timings of inputs are unlikely to change much but there may be changes in the level of granularity as when it comes to the mappings & aggregations these will be materially different. For example, asset feeds from custodians will come in much as they did before. This may then be overlaid with other elements from Bloomberg or other similar market data. It is generally accepted as good advice to make your existing feeds suitable for multiple bases i.e. a multi-dimensional cube that fulfils all use cases. Life and GI liability data extracts may need to be reviewed and changes made. Even where no changes are required at the extract level the treatment of liabilities in terms of accounting and actuarial processes will be very different and potentially complex to embed. Key Point Any additional requirements from source systems (including 3rd party asset feeds) should be built into existing feeds to avoid increases in cost and make internal reconciliations across bases more straightforward. Impacted Source Systems Based on your current estate it might look like this……..
  5. 5. Mappings & Aggregations +44 (0)20 3753 5343 There are likely to be changes in terms of the content of the data and this is due to the same data-sets needing to be capable of being used across multiple bases and regimes – e.g. across both financial and regulatory reporting. Whether or not the additional granularity is in the existing feeds will need to be closely looked at. The GL it will require a whole new set of hierarchies for the business entities for Group consolidation. Some of this may be achieved via adjustment but it will be a sizeable task. Accounting for financial instruments under credit impairment moves to an expected loss basis (i.e. forward looking). Actuarial processes will also need changing because the cashflows (and inputs to cashflow models) may be at a different granularity. Expense and other models will also need to be developed or updated. One example is the Risk Margin calculation which differs from the Solvency II approach although there are some similarities whereby the IFRS Risk Margin offers Cost of Capital basis as one of three alternative approaches. Reporting Policies, Methodologies, Processes and Procedures – these will all need to be in place – no small task! Where the fun starts……… New Asset Classifications New Liability Mappings Business Model GL Account Hierarchies Solo to Group Consolidation GL Account Hierarchies GL Account Structures New Control Framework New Methodologies New Policies & Procedures
  6. 6. Finance Systems +44 (0)20 3753 5343 IFRS will require changes to systems and models…….. Apart from the strong likelihood of significant development of your GL systems suite, there will also be other downstream impacts. Some of these impacts may include the need for new models to cope with some of the concepts being introduced – particularly around the Risk & Residual Margins, Credit Impairment, Expense models and Business Performance & Planning. Short duration contracts are dealt with very differently from (e.g.) Solvency II. Insurers will need to design systems to track the premium amortization whilst ensuring Solvency II systems for claims liabilities separately identify claims for earned and unearned premium, and pre and post-claim cash flows. A major shift in emphasis is that IFRS measurement considers the characteristics of the contract. Solvency II by comparison, is based on the nature of the legal entity New Models? e.g. Risk & Residual Margins Actuarial Model Updates IFRS uses different cashflows
  7. 7. Potential Reporting Implications +44 (0)20 3753 5343 Something for CFOs to think about…. There are a number of potential outcomes as well as some certainties that will arise as a direct result of the new IFRS changes, such as:  Because IFRS 4 P2 and IFRS 9 are not being introduced at the same time this could create a temporary volatility in the underlying financial statements where changes in assets reporting will be implemented into financial reporting around 2 years before corresponding liability changes,  Businesses that do not routinely closely match assets and liabilities likely to see a volatility in their income statement,  Timings to produce IFRS income statement & tricky reconciliations, e.g. Solvency II P+L (internal model) reconciled with the IFRS residual margins – less time available to do more,  Other timing issues are that this is being introduced when (e.g.) Solvency II Solo QRT reporting timescales are still reducing. Complex reconciliations Managing Analyst expectations Staff & Exec training Managing Volatility Solvency II still a moving target
  8. 8. The Strategy & Architecture Group +44 (0)20 3753 5343 At the S&A Group we know a thing or two about what good looks like…. The S&A Group has a wealth of hands on experience when it comes to enabling all aspects of Actuarial & Finance change. We offer a full range of services from consulting to packaged services, training, and thought leadership through to management and delivery of major programmes. If you would like any further information then call us on 020 3753 5343 or visit where you can find out more about our full range of services.