By Larry Danielson, principal, Deloitte Consulting LLP
The SEC's recent release of its IFRS (International Financial Reporting Standards) Roadmap set insurance companies on a course headed for early adoption, which means preparation has to begin today. Understanding the technical accounting involved with adjusting financial statements for the three year period prior to conversion, as required by the IFRS Roadmap, is clearly only the starting point. Execution and success will depend on understanding and implementing the appropriate financial and reporting technology architecture.The SEC's criteria that companies must meet to qualify for early adoption is identified in the IFRS Roadmap and points to 110 US filers that will be eligible; while these companies were not named, it is clear that insurers are among them. IFRS has been normal operating procedure for many insurers with international operations since the European conversion in 2005. Even so, IFRS - especially for life carriers - has always been a bit more complicated for insurers because of the nature of insurance contracts: how risk is defined, the length of the term and how the contracts are valued. The "manual journal entry" approach of using a spreadsheet to make IFRS adjustments simply may not be good enough to provide the necessary, and uniquely complicated, financial controls for global insurance carriers. For many insurers, the first step will be to review their financial systems and decide if a new software version is necessary. Since nearly all insurers use third party software for their financial system solutions, opening an early dialogue with vendors will help determine what strategy to pursue. Based on historical experience from earlier accounting regulatory changes such as demutualization and Sarbanes-Oxley, a broad spectrum of software changes maybe be necessary and range from minor reporting changes to requiring a new system entirely.
Internal coordination is another component of a successful conversion plan. IT executives need to communicate with their CFOs and develop an understanding of how the financial reporting function will change overall. Key areas for consideration will include reserving, actuarial projections and evaluations, and product modification (i.e. insurance contracts and investment products).
Consider potential product modifications. Not only do insurers have to decide if IFRS will lead them to introduce new products and discontinue others, they will have to re-file with the government for the appropriate regulatory approvals required with any changes. And then, on top of that, they will have to modify their product distribution systems.
Another issue is IT platform changes, which can be time intensive. It is vital to identify adjustments early on and consider IFRS' critical impact on downstream and upstream data systems. It is important to take a data-centric approach and focus on how the data itself will be affected. For example, the product systems will need to capture new information for IFRS reporting. Reserving will be another area that may need substantial system modifications to account for how contracts are evaluated and the changing timeframe.
The difficult experiences of some European companies that didn't prepare appropriately for the IFRS conversion, or an unpleasant memory of the Sarbanes-Oxley rollout here in the US, should be enough of an incentive to begin planning now. But the bigger enticement should be the fact that early IFRS adoption may provide a competitive advantage. And in a mature industry like insurance, any advantage to grow should be seized.Understanding the technical accounting involved with adjusting financial statements for the three year period prior to conversion, as required by the IFRS Roadmap, is clearly only the starting point. Execution and success will depend on understanding and implementing the appropriate financial and reporting technology architecture.