The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) are working together to adopt the IFRS standards for U.S. companies. At the same time, IASB is in the process of rewriting IFRS4, which addresses the accounting treatment of insurance risks. We will not know all the requirements until final standards are issued for U.S. companies on Dec. 31, 2011.
Generally Accepted Accounting Principles (GAAP) have been adopted in a hodge-podge fashion over the years. Often accounting rules are imbedded in various core systems and reporting stores. The ledger is often only a repository of ledger entries generated elsewhere. Carriers need to begin thinking about whether it is better to replace or upgrade ledger systems, core systems, and/or reporting stores to deal with this changeover.
For insurance contracts, for example, we know that there will be a need for data in the ledger that policy administration systems were never designed to generate. And the accuracy of this new data is critical, since it will be the basis of financial statements filed with the SEC.
There are two implementation requirements in particular for which insurers need to begin thinking about how they are going address. The first is the parallel reporting period, during which they will have to produce both GAAP- and IFRS-compliant statements. The second is the regeneration of historical financial statements to facilitate period-on-period reporting. For this second issue, it will not be possible to just convert a GAAP statement; a new IFRS statement must be generated.
There are many benefits to adopting IFRS, however, including more consistent financial reporting and a greater ease in consolidation of statements. For large national and global carriers, there will be an even playing field in terms of reporting and understanding results vis-à-vis non-U.S. competitors. As a result, U.S. carriers will be in a better position to compete outside the U.S.
The risks really come in during the transition. Because of the two-year time frame from final rules to compliance, this will be a major initiative that likely will limit the ability of the IT and financial departments to react to other business needs. Carriers that fail to plan their approach before the completion of the final regulations will likely find the challenge of the transition an almost impossible task.
The parallel reporting period will be crucial. Carriers that do a poor job of building the new data rules and sets could face a most daunting remediation task during a closing compliance window. Time lost here could negatively impact the time available for the second implementation. It has to be done right, the first time. Carriers need to proceed as soon as the final standards are issued.
The ability of insurers to leverage these IT investments for other benefits depends on what approach carriers choose to take. If they replace systems, there is the opportunity to gain additional capabilities, business alignment and savings in their IT systems. But this has to be offset by the complexities and risk of doing systems replacement.