The Accounting Standards Board (ASB) believes that the significance of the proposals in the IASB’s recent discussion paper on insurance contracts is not confined just to the insurance industry.
It has issued a briefing paper that identifies a number of issues where the IASB’s thinking developed in the insurance discussion paper could have very important consequences for financial reporting in other sectors.
“This discussion paper is of importance not just to insurance industry specialists but to everyone interested in financial reporting, and I would encourage entities in sectors other than insurance to consider the implications of the proposals for financial reporting in general and to respond to the IASB on this discussion paper,” says Ian Mackintosh, chairman, ASB.
The possible consequences identified include the extension of the use of current exit values for the measurement of items for which there is no market, so that hypothetical transactions between hypothetical market participants must be constructed to provide estimates of current exit value; the exclusion of entity-specific factors in determining current exit values; the development of revenue recognition principles based on changes in value of assets and liabilities rather than on the extent to which services have been provided to the customer, giving rise to ‘day 1 profits’ based purely on estimated exit values; the recognition of future receipts even though the insurer is not contractually able to enforce payment of these; the implications for guidance on non-financial liabilities, and in particular on determining when a constructive obligation should be recognised. the development of new principles on the distinction between liabilities and equity and the separating out or ‘unbundling’ of parts of contracts that are deposits and accounting for these as financial instruments.
If the ASB’s proposals are adopted, there could be a rush of companies seeking to buy out their defined-benefit pension schemes, placing an enormous “new business strain” on insurance companies.
“The ASB has put forward a number of proposals that might be reflected in a future accounting standard on pensions. The proposals include: using a risk-free rate to discount future cash flows and reporting changes in pension deficits and surpluses in the period in which they arise,” says Gary Tansley of actuarial and pensions consultancy, HamishWilson.
“If adopted, the ASB’s proposals will substantially increase companies’ reported pension liabilities and introduce signficant volatility into companies’ P&L accounts. This will radically increase the incentive for those companies that can afford it to get pension liabilities off their books.”
“This makes it all the more important for risk-sharing schemes to be put at the top of the political agenda,” adds Hamish Wilson.