IASB chair speaks on financial stability, insurance contracts and better communication in financial reporting

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Jun 29, 2017

At the IFRS Foundation's conference in Amsterdam, IASB chair Hans Hoogervorst discussed how accounting standards can help financial stability, the new insurance contracts Standard (IFRS 17) and the IASB's effort to improve financial reports so they are a better communication tool between companies and investors.

Mr Hooger­vorst began by noting that although fostering financial stability is not the primary goal of accounting standards, the trans­parency of financial state­ments resulting from the accounting standards is a "crucial in­gre­di­ent for achieving financial stability". He discussed the work of the IASB in recent years to issue standards that lead to high-qual­ity accounting, which then leads to better insights of a company's per­for­mance, the ability to discover problems more timely and an early warning system to detect changes in a company's risks and per­for­mance, amongst other benefits.

In addition, Mr Hooger­vorst talked about IFRS 17 Insurance Contracts that was issued about one month ago and how it is finally an international standard that will reduce the in­com­pa­ra­bil­ity between national GAAPs for insurance. He also noted that IFRS 17 will improve financial stability in six areas:

First of all, the insurance liability will be properly measured and regularly updated, giving much better in­for­ma­tion. The build-up of un­sus­tain­able equity positions will become visible much more quickly.

Second, the cost of options and guar­an­tees will be regularly updated and fully reflected in the financial state­ments.

Third, companies will also provide updated in­for­ma­tion on the risk margin they hold for their insurance products.

Fourth, the losses embedded in onerous groups of contracts will have to be recog­nized im­me­di­ately. Contracts can be grouped, but in a way that ensures that the losses embedded in onerous groups of contracts will not be averaged with groups of prof­itable contracts.

Fifth, IFRS 17 ends up-front profit taking and revenue will only be recog­nized as the service is provided.

Finally, IFRS 17 will also make it easier for investors to judge the per­for­mance of any insurance company. Currently, many investors base their analysis on Solvency II, which is the pru­den­tial standard for the European Union. But Solvency II is almost entirely focused on the balance sheet. It makes no dis­tinc­tion between profits earned in the past and profits to be earned in the future. It does not convey in­for­ma­tion about prof­itabil­ity over time.

In his remarks about the IASB's role in improving com­mu­ni­ca­tion through financial reporting, Mr Hooger­vorst noted that this will be a central theme in the IASB's work plan. Instead of working on major cross-cut­ting Standards, the Board will focus on improving the primary financial state­ments, making dis­clo­sures more effective and improving the com­pa­ra­bil­ity and use of non-GAAP measures.

A full tran­script of Mr Hooger­vorst's remarks is available on the IASB website.

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