IFRS update October 2005 - Case study

Switching to international
financial reporting standards can be a long and arduous task. But if you are
also, at the same time, trying to integrate the financial function and systems
of three large international companies, it represents a significant step up in
the challenge.

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But this is exactly what insurance group Aviva had to contend with. When the
group sat down in 2001 to discuss conversion, it was in the process of
integrating Norwich Union, Commercial Union and General Accident into what was
at that time called CGNU.

On top of this there were some industry specific issues that were starting to
crop up in terms of regulatory reporting, new ways to report on capital, while
new value-based reporting also came to the fore with European embedded value
reporting.
‘That’s a pretty full menu of change’, says Andrew Moss, finance director at
Aviva.

‘It encouraged the company to step right back and say okay, if we are going
to support that level of change we’re going to have to invest heavily in an
overall project to manage it and build a new financial reporting infrastructure
on which to base all of that reporting. So we undertook what was called the
global finance transformation project, with the objective of achieving all of
those things in a timely and well controlled manner over a couple of years.’

But while starting early on IFRS adoption was considered the best approach,
it would also generate its own problems, given that a stable platform of
standards on which to build IFRS accounts didn’t appear until well into 2004.
‘That meant you had to build into your project an ability to be reasonably
flexible and to adapt to changing circumstances as you go along,’ says Moss.

This approach proved its worth when dealing with the constant shifting of
goal posts of financial instruments standard IAS39, as a separate carved-out
version appeared at the European Commission and work continued to bring the two
variants back together again.

Aviva’s flexible approach meant that it was able to move from the IASB’s
version of the standard to the EC’s, and latterly back again without a major
headache.

A project of such scale, which took in around 25 locations across the globe,
was not one that could be undertaken without significant resources. Overall the
company spent £170m on the project with 200 people, at its peak operating as a
central team in London.

‘One of the key challenges was to get the right mix of expertise and there
certainly was a mix of consultants, contractors and permanent staff,’ says Moss.
‘We did hire new permanent staff at that time and brought them into the
organisation with particular skills.

Clearly we wanted to get to an end game where we left knowledge and skills
within the organisation. So I think it was a fairly judicious mix of the three.’

Teams of accounting, actuarial and systems experts moved around the world
ensuring that the systems were set up and ready to collate, process and
interpret the appropriate information to produce IFRS figures.

Another vital element, once systems were in place, was educating important
parties on the changes, both inside and outside the company. As well as specific
training for 600 finance staff around the group on IFRS, there was training for
the board and others who might be affected. Keeping analysts and the investment
community informed of the changes was also crucial in avoiding confusion
impacting on the share price.

‘We took it extremely seriously,’ says Moss. ‘We felt the risk of
misinterpretations of some of those outcomes was real. So being early, being
open about it was extremely important.’

But while Aviva has expended a great deal of time, money and effort on the
conversion process, the story for them is only half over. The current platform
allows the insurance industry to largely carry on as it has been until a full
solution on how to account for insurance contracts can be found.

When that time comes the company will have to look again at the majority of
its contracts. Fortunately, the flexible approach taken by the group to change
should make it a lot less painful when the second round begins.

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