Exposure draft ED5 on insurance contracts is the first of a two-part strategy from the International Accounting Standards Board. It has provoked worries among the insurance community over the potentially huge effect it could have on their accounts.
The European Commission is already urging the IASB to hold talks with insurers to address their concerns over volatility.
This, however, is not the only issue that is causing a stir, with the Association of British Insurers unsure how the new standards will work.
‘We are broadly in favour of the proposals and agree that fair value accounting should go forward,’ said an ABI spokeswoman. ‘But we have some concerns that the IASB has not yet determined how the principles will work in practice.’
The body also feels that until phase two of the project is completed at the end of 2007, the current standards should remain in place.
Accounting practice by insurance companies is currently inconsistent with other industries and differs wildly across the globe, making the IASB’s task a tough one.
It has already admitted that its two-stage project for insurance accounting will not be ready for the 2005 European Union deadline for listed companies to adopt international financial reporting standards.
‘Reaching a conclusion will require careful consideration of all issues and viewpoints that will occupy the board for some time and could not possibly be completed by the 2005 deadline,’ said Sir David Tweedie, chairman of the IASB.
Reaction from accountancy firms to the new standard has in general been positive, but there are still warnings that the insurance community faces massive upheaval.
‘These changes are the beginning of a revolution in insurance accounting by improving the quality of disclosures,’ said Hitesh Patel, partner in KPMG’s financial services practice.
‘The introduction of the interim standard will raise some major issues for insurers to grapple with,’ he added.
‘As well as lower reported premiums and increased volatility in results, insurers will also have to work to a very tight timescale and incur potentially significant costs in developing new reporting systems and processes.
‘The new disclosure requirements may not be easy for insurers to implement, but it will bring them in line with their banking peers and will ultimately improve the transparency and openness of insurance accounting.’
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