IFRS Flashcards
Implications of moving to IFRS
- accounting changes
- potential changes to capital requirements
- potential required product modifications
Differences of IFRS vs GAAP
IFRS:
- more judgement, less reliance on detailed rules
- more transparent, contains significantly more footnote disclosures
- e.g. need to disclose:
= judgments made by management in applying accounting policies
= key assumptions about the future
= key sources of uncertainty at the balance sheet date
3 reasons that private companies will need to have an understanding of IFRS
- competitive
- raising capital in a foreign market
- conducting transitions with an international company
Which companies will benefit from moving to IFRS accounting
- multinationals (insurers and reinsurers) with US subsidiaries
- US headquartered companies entering foreign markets
2 concerns that NAIC has about using IFRS as the basis for SAP
- transaction costs
- complexity of reserve calculations
IASB (IFRS) definition of significant insurance risk
IASB defines signifiant insurance risk as significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance
Explain why the IASB standard of significant insurance risk is weaker than the GAAP standard
GAAP requires that it is reasonably possible that the reinsurer may realize a significant loss
Define Insurance Risk under IRFS 4
Insurance risk is risk, other than financial risk, that is transferred from the holder of a contract to issuers.
Policies that do not transfer significant insurance risk should be accounted for as financial instruments instead of insurance contracts
Define Financial Risk under IRFS 4
Financial risk is the risk of change in one or more of the following:
- specified interest rate
- financial instrument price
- commodity price
- foreign exchange rate
- index of prices or rates
- credit rating
- credit index
Describe the liability adequacy test under IRFS 4
-compare with GAAP
The insurer needs to assess whether its insurance liabilities are adequate at each reporting date. This is based on current estimates of future cash flows, including the cost of handling the claims, and any options or guarantees.
If there is a deficiency, it needs to be reported in current earnings.
GAAP accounting does test for premium deficiencies. These are recorded as liabilities.
Impairment Testing of Reinsurance Assets under IRFS 4
-compare with GAAP
- reinsurance assets needs to be tested for impairment at the reporting date
- impairment can only be recognized if objective evidence suggests that it may not receive all amounts due ( the amount must be reliably measurable)
GAAP treatment is similar. The insurer needs to ensure that the reinsurer has the financial sounds to honor its commitment.
In IFRS 4, under what circumstances can an insurer change its accounting principles
If that change:
- makes the financial statements more relevant to the user’s decisions, without being less reliable
- makes the statements more reliable, without being less relevant
Reliable: the information about an item is representationally faithful, free of material errors, and free of bias
Relevant: the item can make a difference in the user’s decisions
In GAAP, under what circumstances can an insurer change its accounting principles
As long as they can justify that they are preferable to the current
Compare the GAAP to the IFRS treatment of offsetting
Both do not allow offsetting
- offsetting insurance liabilities against related insurance assets
- offsetting income/ expense from a reinsurance contract against expense/ income from a related insurance contract
Compare the GAAP to the IFRS treatment of revenue recognition
GAAP: records the revenue associated with the insurance premium over the duration of the contract
IFRS: recognizes the present value of all premium and expenses as soon as the contract is signed
