A Culture of Compliance and Financial Reporting Best Practice

As the complexity and volatility of the business environment has increased, the demand for improvements in the quality of financial information from investors and other decision makers has risen in tandem. Unsurprisingly therefore, the topic of changes to International Financial Reporting Standards (IFRS) has  become increasingly prevalent. However, before delving into what these changes  mean for an organisation, it is perhaps useful to first provide an overview of the nature and purpose of IFRS.

For anyone in the accounting or finance fields, this acronym has become a common phrase critical to any financial reporting undertaken by an organization. International Financial Reporting Standards are developed and issued by the International Accounting Standards Board (IASB) and provide guidance on how financial statements should be prepared and disclosed. They provide a framework for consistent and comparable information which ultimately helps investors, regulators and other interested parties, make decisions. In other words, as a global standard, they provide a level playing field amongst companies for reporting financial performance. This is a matter not only of compliance, but also of corporate governance, and thus an integral part of how any financial services sector business ought to be doing business.

As an indication of the pace of change, in the last three years, over twenty new or amended accounting standards have come into effect. The insurance industry is  currently in the process of implementing IFRS 17, which speaks specifically to insurance contracts, replacing its predecessor, IFRS 4. The standard will come into effect from 2023 and will significantly change the accounting process for insurance contracts and investments contracts with discretionary participation features. This new standard has been described as the single largest change in insurance accounting for almost a generation.  

The standard is intended to provide a more detailed and rigorous framework for  the measurement and recognition of key insurance related values and will significantly change the way in which insurers measure and recognize insurance liabilities, revenue and profit. It will also change the presentation of the income statement and statement of accounting position and will require a significant number of new disclosures in the financial statements. The standard requires more detailed measurement of insurance related cashflows, introduces new methodologies for measuring and recognizing insurance contact liabilities and introduces a number of new concepts such as insurance contract margin and risk margin.

All of these changes are meant to create greater visibility of the relationship between the provision of insurance services and the recognition of revenues and expenses relating to the provision of these services and to align the recognition of revenue and profit with non-insurance businesses.  The overarching intent of the standard is to reduce the variability of results due to differencing accounting treatments employed by various insurance entities and to  improve the comparability of financial results between insurance businesses as well as between insurance and non-insurance businesses.

Although its purpose is relatively simple conceptually, the impact on affected organisations, particularly internally, will be massive. The practical adoption of the standard will require significant changes to accounting processes and may also require operational process changes to ensure, for example, that the required information is captured during the sales and client onboarding stage. Greater integration across the various functions of the business is a key factor . The impact on long-term and life insurers is much more significant compared to short-term insurance. There also needs to be sufficient training of relevant stakeholders, including staff and investors.

Against this background, it should be clear that it is of paramount importance that professionals in the sector are already in the process of ensuring they are well-versed with IFRS 17.

Let us broadly consider the current state of readiness of the industry. In their report, In it to win itKPMG gathered, analysed, and benchmarked data from 160 insurance companies across 30 different countries on their journey to IFRS 17 implementation. According to the report, larger companies are significantly more likely to be further along and have done so by parallel running their current system of reporting with IFRS17, at least one year before going live. Of these 160 companies, only 8% of the insurers surveyed plan to implement after 2021, due to delayed local adoption or the exploration of the standard to increase comparability with global peers.

Some partners who will be affected by the implementation of IFRS 17 include the regulator; NBFIRA (Non-Bank Financial Institutions Regulatory Authority) and BURS (Botswana Unified Revenue Services), who will need to be engaged extensively as we now need to look at new models of compliance. Consideration will also need to be given to potential effects on the end insurance user, the policyholder, and to ensure that they are not disadvantaged by any changes brought about for operational or technical reasons.

Undoubtedly complex, there is certainly a lot of understanding which needs to be gained around the implementation of the new standard, hence the importance of running parallel against existing systems, as a means to determine the effects of changes brought about by the standard.  There is, however, plenty to look forward to as an industry looking to improve its significance in the global economy. Internally, it provides an opportunity of insurance businesses to review and ensure the quality of their data and apply consistent principles to the production of financial information. More broadly its advantages include greater transparency by, for example, distinguishing between, profitable and non-profitable groups of contracts, enhancing investor understanding of and confidence in the business, and facilitates long-term financial stability

Financial reporting standards are ever-changing because they evolve just as the needs, wants and capabilities of the industry and its stakeholders evolve. They keep businesses ethical, current, and agile for the benefit of the industry and the customer.  Beyond pure compliance, the standard is a matter of principle and accurately highlights the sustainability of a business.  As we prepare for IFRS 17, the question is how businesses in the insurance sector are gearing themselves up to do more and truly leverage the opportunity to embrace and strategically purpose themselves towards better deliverance of insurance solutions for life and more.  It is about, rationalising and streamlining processes, and creating good habits of governance, and a culture of compliance and financial reporting best practice.

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