Ratings more volatile under new standards

Link: IAS special report

The international ratings agency said that a new accounting regime could affect various company scores ‘depending on the response of management and investment markets to the new standards’ or if ‘the basis of taxation were to be affected by changes in compliance’.

The agency said it could not rule out the possibility that the additional disclosure and information contained in accounts could lead to ratings changes due to an ‘improved perception of risk, based on the enhanced information available’.

Andrew Murray, associate director in Fitch’s insurance group and co-author of Mind the GAAP – Fitch’s view on insurance IFRS, said that progress was being made, but that there was still a long way to go to satisfy all parties involved.

‘Although the new accounting standard for insurance contracts (IFRS4] has significant limitations, we believe it is an important step in the right direction with greater consistency between insurers and enhanced disclosure. However, the ultimate goal of fair value accounting for both assets and insurance liabilities remains a long way off.’ He added that it was ‘easy to pick holes’ in IFRS, but that the changeover was a positive move.

The report addressed concerns over the potential volatility the standard may introduce into accounts, and said that any volatility introduced in phase one was ‘a small price to pay for showing an up-to-date picture of the balance sheet position’.

It also pointed out that volatility should be closer to the underlying economic reality once phase two was completed in the next few years.

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