Canadian insurance industry

While the move to International Financial Reporting Standards (IFRS) will significantly impact the Canadian insurance sector, the most significant changes will occur after 2011.

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. The first phase of IFRS 4 is still in effect for Canadian insurers transitioning to IFRS in 2011.

In developing the second phase, the IASB has been working alongside the US Financial Accounting Standards Board (FASB) to develop a harmonized IFRS for insurance contracts. After much debate, the IASB issued an Exposure Draft on July 30, 2010 (for more information visit http://go.ifrs.org/insurance_contracts). The proposed new standard fundamentally changes the accounting by insurers and other entities that issue contracts with insurance risk. A final standard is now expected to be issued in the first half of 2012 with an effective date likely to be 2014/15.

PwC issued a summary of the board's new proposals upon release of the Exposure Draft and in August 2010, published the 'Practical guide to IFRS - insurance contracts' which explores the key provisions and provides 'at a glance' highlights as well as key observations on the proposed new standard.

PwC has closely followed the standard's development since the exposure draft was issued and regularly publishes a summary matrix which summarizes tentative decisions made to date as well as comparing the proposed new standard with FASB’s tentative views to date, highlighting the differing views of the IASB and the FASB, and points of agreement.

Canadian insurers cannot afford to ignore the proposed changes or delay in finding out how to prepare for the new requirements.

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 insurance contract definition under IFRS if they do not transfer significant insurance risk. In this scenario, there will be a shift from reporting the issuance of these products as insurance premiums to either a financial liability on the balance sheet in accordance with the financial instruments standards or as other revenue for a service type contract.

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 as claims development tables.

Other differences that will require consideration at transition include:

• Financial instruments—recognition and measurement
• Investment property
• Pension accounting
• Stock-based compensation

As well as the forthcoming changes in accounting for insurance contracts, Canadian insurers are also facing a shake-up in other key areas of financial reporting after the initial transition to IFRS in 2011, including the accounting for financial instruments, leases and pensions.

Contact one of our IFRS professionals today to see how we can help your insurance company with its conversion process and preparation for the new accounting standards.