International Accounting Standards The Big Picture Chris Lewis

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(No Transcript)
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International Accounting StandardsThe Big
PictureChris Lewis Greg Martin
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Plenary Overview

• The Stable Platform - widget makers to banks Greg
• The Not So Stable Bits an update Greg
• The Regulators View APRA ASIC Chris
• Actuaries Industry what are they doing? Chris

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The Stable Platform

• IAS apply from 1/1/05
• Affects all reporting entities
• From widget makers to banks, public sector
• IAS implemented in Australia via AASB
  equivalent standards. IASB conceptual framework
  adopted.
• New AASB all published 15 July 2004
• Based on IAS as at 31 March 2004
• Disclosure of general impact of IAS on future
  results from 30 June 2004 for listed entities

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Widget Makers Changes/Impacts

• Debt / equity definition changes
  reclassifications
• e.g. preference shares
• Net asset impacts. Capital funding and securities
  structures
• Business combinations, Goodwill, Joint Ventures
• Combinations various technical (but
  significant) changes
• Goodwill Non-amortisation. Reduced MA issues
• Intangibles and masthead values
• Signification net asset impacts
• Tax issues to be clarified (?)
• Extractive industries outstanding issues

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Widget Makers Changes/Impacts

• IAS19 DB super funds onto the balance sheet
• Volatility (see more later)
• Share based payments (employee share options)
• Valuation. Disclosure.
• Increased expense
• Financial Instruments
• Non-derivative mostly on balance sheet at fair
  value
• Embedded Derivatives fair value PL and balance
  sheet
• Hedge accounting (commodities especially)
• Volatility and mismatch issues

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Widget Makers Changes/Impacts

• Other common items
• Tax PL ? balance sheet. certain ? probable.
• Revaluation of non-current assets
• Investment property. Foreign currency translation
  reserves.
• Others such as leases devil in detail
• Presentation changes OEI, OCI, recycling
• True and fair view over-ride
• Opening position as if IFRS always applied
• Need to back fit few transitional outs
• Disclosure

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Banks Changes/Impacts

• As per widget makers generally, PLUS
• Recognition/De-recognition - Securitisation
• Some off balance sheet arrangements back on
• Impaired assets and general provisions
• Asset specific provisions only no general
  provisions
• Discounted values, not undiscounted test
• Increased work
• EMVONA (life subs) out
• But non-amortised goodwill in
• Reduced volatility
• Embedded derivatives at market value disclosure

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Banks Changes/Impacts

• Hedge accounting
• Regulatory issues (see later) - capital,
  securitisation
• Potential increased volatility
• Hedge accounting
• Embedded derivatives at market value
• Financial instruments AFS balance sheet
  volatility
• Impaired assets no general / dynamic
  smoothing
• Increased disclosure

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Life Insurers Big Picture

• 1038 now only insurance contracts ( Par)
• Investment contracts under AASB139 and AASB118
• Unit linked, investment account, term certain
  annuities
• Assets under other standards - AASB139, AASB140,
  AASB116. Also AASB127, AASB128, AASB131.
• Fair valuing subsidiaries gone almost!
• Tax under AASB112 (IAS12) no discounting

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Life Insurers Changes/Impacts

• Insurance liabilities ( Par)
• Mostly unchanged
• Discount rate change for non-asset linked
  liabilities
• But see later
• Reinsurance no inception profits, separate
  treatment
• Extra work
• Investment contracts
• Various changes but mostly DAC
• Substantially reduced DAC amount (see further
  later)
• Pattern of DAC amortisation. DAC on balance
  sheet.
• Recycling profits on in-force
• Net profit effect depends on future volume via
  life ? FM

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Life Insurers Changes/Impacts

• A number of asset related issues
• Assets backing policy liabilities stay at fair
  value (generally)
• But not all have fair value option, or some only
  via equity
• Realisation costs gone
• Resulting unit pricing and asset linked liability
  issues
• Base policy benefits on new accounting???
• No discounting tax
• Non-FV asset treatments
• Equity???
• Accounting assets not align with realisation
  values / prices
• Accounting treatment if dont change benefit
  basis?
• Valuation liabilities?

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Life Insurers Changes/Impacts

• Treatment of subs and associate assets still
  unclear
• Different Parent and Consolidated treatment
• Where back policy liabilities, different policy
  liabilities?
• Other assets retain options AFS
• Profit management opportunities?
• Volatility/mismatch impacts
• Regulatory issues - see later
• Disclosure
• Friendly Societies see later

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General Insurers - Changes

• 1023 also now only insurance contracts
• Liabilities now include a risk margin
• Unearned premium DAC, subject to adequacy test
• Discount rate clarified
• Asset values per life insurers
• Reinsurance / reinsurers
• Inception profit restriction
• Estimates and forward allowances
• Other changes per widget makers, banks, life
• Debt/Equity, Super DB Funds, etc

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General Insurers Impacts Issues

• Outstanding claims some up, some down
• APRA 75 not required, but has to be disclosed
• Discount rates some increase in liabilities
• Premium (minus DAC) Liabilities
• Loss recognition / adequacy testing by LOB
• If based on 75 sufficiency hard / conservative
  test?
• Profit deferral - Drag on growing insurers
• Reinsurance / Reinsurers
• Some asset issues (mismatch for non-FV assets)
• Disclosure extra work

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Funds Managers

• Managers themselves
• Impacts largely as per widget makers generally
• Some potential secondary impact on fees via
  secondary impacts on unit funds impacts (see
  below)
• Clarification of availability of DAC per life
• But incremental only as per life
• Profit bring forward for growing manager
• Life / FM groups.
• Unit Funds
• Limited direct impact IASB not directed here
• Secondary impacts via potential asset value
  impacts

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Super Funds

• Funds themselves
• Limited direct impact IASB not directed here
• Secondary impacts via potential asset value
  impacts
• DB Funds Employer accounts
• AASB19 Net assets to employer accounts (on PUC)
• Australia has not allowed corridor under IAS19
• Full volatility
• AASB Australia has no deep corporate debt
  market
• Value liabilities at CTB rate! Maybe revised
  (IFRIC).
• Volatility ? Investment strategies, future of DB
• Actuaries having to explain IAS19 v funding
• IAS19TF Workshop to discuss / find out more

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The Not So Stable Bits

• Life Discount rates
• Life GI Assets backing insurance liabilities
• Also Phase II eventually
• Investment Contracts Acquisition expenses DAC
• IAS39 ED132 - Fair Value Limitation
• IAS19 / AASB119 The third option
• Also Phase II eventually

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Life (AASB1038) Discount rates

• Final 1038 changed discount rates
• 8.7 life insurance liabilities shall be
  discounted for the time value of money using
  risk-free discount rates based on current
  observable, objective rates that relate to the
  nature, structure and term of the future
  obligations.
• 8.8.2 In applying paragraph 8.7, typically,
  government bond rates may be appropriate discount
  rates for the purposes of this Standard, or they
  may be an appropriate starting point .
• Not sure where this is going to end up.
  Annuities, YRT.
• Look to get something sensible via AS1.04.
• Get LIASB/AASB to agree 1038 As1.04 mean same
  thing.
• Significant risk of annuity discount rates
  inconsistent with IAS39

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Assets backing insurance liabilities

• 1023 and 1038 Assets that back insurance and
  investment contract liabilities to be measured at
  fair value through profit or loss.
• No specification of what this means
• The final version of 1038 was amended to remove
  the direction that this means statutory fund.
• Note APRA/LIASB decisions and asset tagging
  issues.

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Investment ContractsAcquisition expenses DAC

• GN550 Now out as a formal discussion draft.
• What are deferrable acquisition costs
  (incremental transaction costs) is probably main
  issue to resolve
• International interpretation trending towards
  tier 1.
• That is, variable expenses only.
• But pattern of amortisation also important
• IAS39TF Workshop to discuss / find out more

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ED132 - Fair Value Limitation

• IAAust AASB opposed ED132
• So did vast majority of respondents to IASB.
• No response from IASB yet
• Looking like Europe will adopt a modified IAS39
• Will not adopt IAS39 either as it is or with FV
  limitation
• If FV limit does come in, not likely now until
  2006
• Clarification on any of this not likely before Q4
  2004

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IAS19 / AASB119 The third option

• ED131 proposes a third option (second for
  Aus)
• Current two options
• All changes in net assets of DB fund to profit
• Deferred recognition if inside /- 10 corridor
• Australia only allows first of these (full
  recognition)
• New option being considered
• Expected expense to profit or loss
• Actuarial gains / losses to equity
• Issues include how gains / losses get out of
  equity?
• If comes in, will not be until 2006 (but early
  adoption)

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APRA
The Preliminary View from the Regulator Chris
Lewis
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General Principles

• IFRS doesnt fundamentally alter underlying
  business
• Capital requirement levels shouldnt normally
  change just because accounting does
• However, mechanics may well change where items
  recorded in accounts are used in capital
  calculations
• Changes may highlight some areas where capital
  requirements would benefit from revision

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APRAs Approach

• APRA will release a series of discussion papers
  over next few months, and consult
• APRAs approach is aiming to minimise disruption,
  but NOT minimise importance of industry being
  ready for this change
• Will identify potential changes to prudential
  rules and statistical requirements, categorised
  into four groups

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APRAs Approach (contd)

• Changes in 2005 (from 1 July or later)
• Changes expected in 2005, but harmonised with
  approaches of overseas regulators
• Possible changes after 2005, after monitoring
  prudential impact of IFRS
• Areas where no change expected

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Initial Picture

• No changes to standards before 1 July 2005
• With a few exceptions, retain existing accounting
  treatment, and hence existing prudential
  outcomes.
• Consider other international approaches and
  monitor experience before any further changes.
• May entail some dual reporting

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Bank Capital Issues

• Debt v Equity Classification Tier 1 Capital
• EMVONA
• Securitisation
• Super Fund Surpluses and Deficits
• Hedge Transactions
• General Provisions (change from expected basis
  to incurred basis)

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Debt v Equity Classification

• If treated as debt then may no longer eligible
  for Tier 1 Capital
• IFRS approach more stringent (and may be
  justified).
• Wait to see stance taken by Basel.

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EMVONA Tier 1, 2

• Value of In Force Business in a life office
  subsidiary where the life office is in turn owned
  by a bank.
• May be removed from retained earnings and so
  should be a deduction from Tier 1 Capital,
  whereas currently deducted from Total Capital.
• Need for transitional arrangements

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Securitisation

• If brought back on balance sheet then (under
  current rules) would generate additional capital
  requirements.
• Affects many smaller banks and building
  societies.
• Reinstate existing rules for prudential purposes,
  then wait and see.
• APRA intends to review securitisation more
  broadly leading into Basel II

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Superannuation Fund Surpluses

• Applies more broadly than just banks
• APRA intends to review its prudential approach to
  treatment of surpluses and deficits

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Other Comments.

• If changes affect retained earnings then affect
  Tier 1 Capital.
• In most cases, retain existing accounting
  treatment for prudential purposes.
• Wait and see.
• Recognise that this may impose some element of
  dual reporting

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Life Insurers

• Strategy broadly the same minimise disruption.
• Working with the LIASB.
• Possible issue around dual reporting in the short
  term.

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Major Changes

• Treatment of Investment Contracts
• Treatment of Deferred Acquisition Costs
• Measurement of Assets
• Treatment of Deferred Tax Assets and Liabilities
  with no discounting
• Owner occupied property
• Disclosures
• Others (as for banking)

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Investment Contracts

• May require a new standard.
• Build on GN550
• Financial instrument component at fair value
• DAC amortisation comparable to AS1.03, but may
  require some constraints to satisfy traditional
  accounting view of DAC (? AERC)

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AS1.03

• Changes to discount rate
• Loss recognition to include any intangible assets
  arising on acquisition
• Align asymmetry treatment with treatment of
  embedded derivatives
• Reinsurance treatment and disclosure
• Changes to expense allocations to accommodate
  investment contracts.

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AS2.03, AS3.03

• Market Value v Fair Value
• Assets that are not fair valued
• Changes to discount rate
• Deal with DAC asset on investment contracts
  (unless offset against liability under PR 35)
• Undiscounted deferred tax
• Inadmissibility rules to align with EMVONA
  treatment
• Any other changes on LIASB agenda (?AS6.02?)

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Friendly Societies

• Currently exempt from AASB1038/MoS (ASIC class
  order) and have own policy liability standard
  ASFS1.02
• Still have to comply with AS2.03,AS3.03, and
  AS6.02
• ASIC class order expires during 2005, unlikely to
  be extended
• Would then need to comply with AASB1038 - MoS for
  insurance contracts (until Phase II) and new
  rules for investment contracts
• ASF1.02 will need amendment whatever outcome

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General Insurers

• Changes are more minor (most business is
  insurance)
• Most impacts in respect of disclosures
• Note 2001 legislation and standards divorced
  prudential accounting from AASB1023
• Industry also subject to changes arising from
  Stage II of the GI Regulatory Reforms

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Impact on Liability Valuations

• Minor changes to liability valuation
• Generally move accounting standards more towards
  prudential standards (e.g. discount rates,
  liability adequacy testing, risk margins)
• But still some potential for dual reporting (e.g.
  unearned premiums)
• Significant new disclosures (e.g. sensitivity
  analyses, claim developments, risk
  concentrations)

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Capital Impacts

• Changes to measurement of assets will need to be
  accommodated (same as for life insurance)
• Changes to definitions of Tier 1 and Tier 2
  capital (same as for banks).

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An issue causing difficulty asset measurement

• Most standards currently uses market value
  essentially mid price less transaction costs
• Fair value (where available) requires bid price
  with no realisation costs
• Results are often very similar, but not same
• Need to balance desire to maintain the status quo
  against dual reporting impacts
• Note change may also be an issue in unit pricing
• Potential for different treatment between parent
  entity and consolidated accounts

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Funds Managers

• These arent APRAs domain.
• However, there may conceivably be some impact on
  rules governing the determination of net assets /
  liquid assets.

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Superannuation (DB's)

• There are no significant prudential issues
  expected for funds themselves.
• Main impact is on the sponsors accounts.

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Actuaries Industry - What Are We Doing

• Internationally
• By the Institute
• By the Regulator

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International Actuarial Association

• Developing guidance notes to support IFRS
• Most at the educative level, although a few will
  in time constitute recommended practice
• Expected to be released shortly for 4 month
  exposure period
• IAAust has various task forces which will provide
  feedback and assess impact on IAAust standards
  and GNs
• IAAust should aim to be consistent, although ours
  should have higher standing

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IAAust

• IAS19TF - IAS19 guidance
• IAS39TF Drafted GN550 considering a note on
  deferability of expenses
• Attempting to balance desire for minimal change
  against ideal of consistent treatment for life
  and non-life investment contracts
• Support actuarial role in the non-life space.
• AS1.03 Task Force to provide advice to LIASB
  / APRA on changes required / proposed for
  existing standards
• Phase II will need to contribute to IAA as this
  develops

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Industry

• How is everyone doing?
• Results of APRA survey ADIs, GIs, Llife
  Insurers and Friendly Societies.

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State of Readiness as at 31 March

• Less than half assessed as prepared, although 95
  confident they can manage. Smaller credit unions
  and friendly societies have the most to do.
• Operational risk of more concern than prudential
  soundness
• 86 of entities managing transition in-house.
• 75 of these have average, or less, IFRS
  knowledge
• Smaller entities relying on auditors.
• Conversion to cost 80m (at least).
• Around 30 were yet to communicate impacts to
  Board.
• Negative financial impact greatest for life
  insurers