Contributor: Dave Zdechlik
Last month, my blog post discussed the current status of the Securities and Exchange Commission’s (SEC) review of International Financial Reporting Standards (IFRS), with the goal of providing an overview of the issues and likely timeframe for an announcement. Today, the focus is on convergence and the implications this has for insurers.
When it comes to convergence, what will it end up looking like? Will there be full convergence or some type of modified convergence? All we know is it appears more likely than not that, at some point, the SEC will require U.S.-based companies to adopt IFRS in preparing financial statements. Sometime this year—it could be June, it could be December—the SEC has committed to make an announcement regarding adoption of IFRS.
In June of 2010, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board (“IASB”) issued a joint statement saying they are in the process of developing a modified strategy regarding the completion target date of convergence projects. The modified strategy will not negatively impact the SEC’s 2011 IFRS adoption announcement, and it would accomplish several important goals:
- Prioritize issues and projects that will facilitate convergence between IFRS and US GAAP;
- Stagger the publication of exposure drafts and limit the number of significant or complex exposure drafts;
- Seek public input about effective dates and transition methods for the issues and projects; and
- Retain the target completion date of 2011 for many of the projects where a converged solution is urgently required.
While we are waiting for convergence and the SEC’s announcement, what are the issues insurers need to be thinking about?
Perhaps the biggest challenge is the fact that IFRS is a different approach to financial reporting. Because the IFRS are principles based, companies will have to come to their own conclusions and provide supporting arguments for their decisions. They will also need to document their decision-making internally in order to ensure continuity of approach from year to year.
This has important ramifications for insurers in terms of the people making those judgment calls, the processes by which they make them and the systems that will capture them. Financial reporting by IFRS will demand a different skill set, a different level of experience and decision-making ability. Insurers will need to reassess who makes various decisions and what changes to internal processes will be required. They will also need to invest in different technology to manage and document financial reporting.
What can you do now? Now is the time to involve your accountants and other advisors in planning for U.S. GAAP and IFRS convergence. Be pro-active and start the process of understanding what the affects of convergence will be on your organization. . The SEC has publicly stated its support of high quality global standards. With the FASB working together with the IASB on the convergence of accounting standards, it is not a matter of “if” but “when” adoption will take place. Start now, and allow for your organization to be ahead of the game.
Keep posted for further blogs on IFRS and how it may affect your organization.
Additional IFRS Resources:
Did you know that the Securities and Exchange Commission (SEC) will be making an announcement in 2011 regarding the requirement that U.S. based companies adopt IFRS as the standard to be used in preparing financial statements?