The new IFRS rules on consolidation
Understanding the practical implications for life insurers
Insights into IFRS Insurance the new IFRS Rules on Consolidation:
IFRS 10 – Consolidated Financial Statements will have a material effect on life insurers because they often structure investment funds to collect and invest the proceeds from their policyholders. These funds are then used to back the obligations that insurers have committed to their customers.
- As it was true under the previous versions of IFRS the insurer would need to consolidate these funds if it controls them. IFRS 10 introduces new guidance on when an insurer controls a fund which would expand the number of funds that would be consolidated in the financial statements. The key impact is that the insurer would report more frequently its interests in these funds on a line by line basis rather than as a holding of shares in the fund.
- More assets and liabilities held in these funds will appear directly on an insurer's balance sheet and be accounted for based on the relevant IFRS rules that apply to such assets and liabilities. This means that the assets of the fund would be reported in different lines of an insurer’s balance sheet depending on their nature (cash, properties, debt securities, equity securities, etc.).
- A very popular feature that life insurers have embedded in many insurance contract is one that links policyholders’ benefits directly to the value of the assets in specific investment funds the insurer has set up. This feature can be found in “unit-linked” and “variable annuity” contracts which have been purchased by millions of policyholders around the world. With the new IFRS 10 rules insurers may have to abandon the practice of presenting these “linked” assets as a single line item and instead they would have to look through each fund and ensure all data is ready and audited for inclusion in the consolidated financials.
- The more material impact from greater consolidation would arise where the insurer’s solvency capital requirements and debt covenants are based on IFRS balance sheets. In addition to this every insurer would have to face the operational challenge of a much larger consolidation effort combined with the fact that the consolidation would be done for the first time and that it would have to be accommodated within a timetable that is likely to be tighter.