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

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29 Jun 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 recognised 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 recognised 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 finacial 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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