IASB Chairman, Hans Hoogervorst, delivered a speech on IFRS developments around the world, the IASB work on the completion of the insurance contracts Standard and on future agenda.
IFRS Standards around the world
Mr Hoogervost said: “Broken down by region, we see that Europe and South America are both fully on board. In North America, we have Canada and Mexico as full adopters. Of course, the United States has yet to move forward with domestic use of IFRS Standards. However, more than 500 foreign companies listed in the United States report using IFRS, so the issue Daimler-Benz had has now gone away. Pretty much all of the major African economies are also full adopters.
The last couple of years we have also seen a lot of progress in Asia and the Middle East. All but one of the Middle Eastern countries surveyed require the use of IFRS Standards, while in Asia we continue to see good progress towards IFRS Standards across the major Asian economies.”
Insurance contracts accounting
There is variety in the measurement of the insurance liability. Some insurers use discount rates that are based on the expected return of assets, others use risk-free discount rates; others still use historical rates based on interest rates at the date of inception.
As a result, the devastating impact of the current low-interest-rate environment on long-term obligations is not nearly as visible in the insurance industry as it is in the defined benefit pension schemes of many companies. Clearly, discounting an insurance liability that was incurred 15 years ago at a historical interest rate of 5-6 per cent does not give relevant information in a time when interest rates are close to—or even below—zero.
In some cases, minimum-return guarantees and other complex features are typically reflected in the insurance liability only when they become worth exercising and even then typically only at an amount that does not reflect their true economic value. For a bank, such treatment of complex financial liabilities would be unthinkable.
As a result, there is not only a lack of comparability among insurance companies, but there is also a great lack of comparability between insurance and other parts of the financial industry, such as banks.
To be fair, most insurers are aware of the shortcomings of current accounting rules and many provide investors with supplementary non-GAAP measures, such as embedded value estimates. But while these non-GAAP measures can give useful information, they suffer from the usual problem of lack of rigour and comparability.
The lack of comparability and the often poor quality of current accounting practices in the insurance industry around the world is clearly unacceptable. Investors know it and the insurance industry itself knows it too and I am happy to say the industry is very supportive of us creating a new Standard. Everybody agrees it is urgent. That is why the IASB is determined to publish the Standard.
Better communication
Better communication will also be home to a number of current and future projects—all designed to improve the communications effectiveness of financial statements. These include the remaining parts of the Disclosure Initiative project, such as the Materiality Practice Statement and the upcoming Principles of Disclosure document. The IASB also needs to do more work on digital reporting, as financial information is increasingly being consumed electronically.
Full speech
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