The proposed exposure draft relating to Phase II of IFRS 4 insurance contracts : an analysis of its impact on the preparers and auditors of Maltese insurance companies

Abstract

The lack of consistency found in the financial statements of insurance companies created the need for a new standard on insurance contracts. As a result, IFRS 4 was developed. The project was split into two phases. Phase I, issued in March 2004, deals mainly with contract classification and disclosure. Phase II, currently still in progress, relates to measurement and recognition practices of insurance liabilities. It will eventually revise the interim standard created by Phase I, and is due to be implemented in 2011. This study sets out to identify the potential impact of the exposure draft pertaining to IFRS 4 Phase II on the local insurance industry. For the purpose of this study, several individuals were interviewed in order to obtain different views on the impact of this new standard. Interviews were carried out with 4 local insurance companies, the Big 4 audit firms and MFSA. Findings revealed that a significant impact will in fact arise once IFRS 4 Phase II is implemented. This will result in added costs and the need for further resources for insurance companies and auditors, including enhanced IT systems, increased personnel within the firm, training of employees and the use of actuarial expertise. Most participants believe that its implementation will enhance transparency and increase available information. However, this may arise at the cost of greater complexity. Through a nationwide standard, insurers' financial statements will now be based on a consistent form of accounting, thus increasing comparability for users of the accounts. While the majority of participants believe that the main impact will fall on general insurance, a few feel that life insurance may endure the greater changes. Many insurers claim that no improvements have yet been made within Consistency between the two projects will enable companies to save time and costs relating to their implementation. In spite of a few negative views, the majority of respondents believe that IFRS 4 Phase II is necessary and will reap multiple benefits for the insurance industry. Given that the standard is due to be published in 2011, its actual impact on the insurance industry is still to be seen.