Canadian insurance industry

While the move to International Financial Reporting Standards (IFRS) is expected to significantly impact the Canadian insurance sector, exactly how remains unclear. The complexity of accounting for insurance contracts resulted in the International Accounting Standards Board (IASB) taking a two-phase approach. The first phase was the issuance of IFRS 4: Insurance Contracts in 2005, which was limited in scope but provided insurers for the first time with a universal definition of an insurance contract. However, it did not address the measurement and recognition of insurance contracts and left in place the valuation methodology currently followed under the various local GAAPs.

In May 2007, the IASB published a discussion paper setting out draft proposals for the measurement of insurance contracts (Phase II). This standard is not expected to come into force until after Canadian insurers move to IFRS in 2011. The Phase II standard redefines how insurance liabilities will be valued and attempts to provide a more economically relevant valuation that will allow for consistency and comparability across borders.

Despite uncertainty around the valuation model and the extended time horizon for implementation, companies cannot afford to ignore the proposals. The direction that the IASB would like to follow is clear and the implications to the industry could be significant.

Key differences between Canadian GAAP and IFRS

IFRS 4, Phase I, while not a fundamental overhaul for the industry, could still have significant implications on the financial reporting for insurance companies. Some products currently sold by an insurance company may not meet the IFRS insurance contract definition. In this scenario, there will be a shift from reporting the issuance of these products as revenue to a financial liability on the balance sheet that requires fair value accounting in accordance with the financial instruments standards.

IFRS 4, Phase I also includes significant disclosures requirements, with the objective of enabling the users of the financial statements to evaluate the nature and extent of risks arising from the insurance contracts. Such disclosures would include sensitivity analyses to changes in assumptions as well claims development tables.

Other differences that will require consideration:

• Financial instruments—recognition and measurement, disclosures
• Pension accounting
• Stock-based compensation
• De-recognition of financial assets and liabilities

Contact one of our IFRS professionals today to see how we can help your insurance company begin the conversion process.