International financial reporting standards

International Financial Reporting Standards (IFRS) have changed the way financial statements are presented and the criteria by which financial services organisations’ performance and prospects are judged by customers, analysts and investors.

Although the move to IFRS presented a significant implementation challenge, it has provided a potential catalyst for the development of improved management information systems that can enhance the basis for decision-making and help meet stakeholder demands for more open and useful disclosure.

Following the publication of the 2005 accounts, PricewaterhouseCoopers carried out detailed analysis of the financial statements of a selection of leading banks and insurers to see how they had applied IFRS.

On the banking side, the analysis indicates that compliance has been the principal objective for disclosure. None of the surveyed banks sought to lead the way in establishing innovative or distinctive standards of transparency in relation to their risks, operations or financial activities.

Minimising the potential volatility arising from the introduction of IAS 39 was a particular priority. A full range of hedge accounting strategies were used to reduce derivative-related volatility in the income statement to less than 5% of net income. The impact of the adoption of IFRS on loan loss reserves was surprisingly limited. However, changes to loan impairment processes are expected to cause additional income volatility in the future and banks will need to address the ramifications as a key part of their market communications strategies.

On the insurance side, the study confirmed IFRS’ contribution to greater transparency. This includes valuable new insights into risk concentrations, sensitivity to market movements and the nature of the assumptions underlying liability evaluations. However, the study found marked variations in the clarity of the presentation and explanation of this new information. Although some inconsistency may be expected under a principles-based regime, insurers may come under pressure from analysts and investors to standardise the basis of presentation in areas such as sensitivity analysis and claims development tables.

Looking ahead, the development of a finalised ‘Phase II’ standard for insurance contracts is now reaching a critical stage. The existing historic cost models that were retained under IFRS 4 are likely to be replaced by an asset-and-liability approach in which earnings recognition is based on movements in asset and liability values. Asset measurement will continue to be generally based on IAS 39 rules. However, there are evident differences between the approach to liability measurement currently proposed by the standard setters and some within the industry, including how to estimate the risk margin, value of future claims and returns from participating contracts.

Across all segments of financial services, there is the challenge of developing a sustainable approach to IFRS reporting. In many instances, the preparation of the IFRS accounts had ended up being a convoluted process, requiring a patchwork of spreadsheet consolidations and last minute manual adjustments that left little time for accuracy checks, management review or structured presentation. The process was also costly in time and money, with many companies relying on contractors or ad hoc project teams whose personnel were forced to neglect other responsibilities.

Better prioritisation, standardisation and co-ordination could therefore go a long way towards creating a more efficient and flexible approach to reporting capable of managing change and providing quality information for internal and external stakeholders. A more proactive and streamlined approach could also help finance teams to make best use of cost saving options such as outsourcing and offshoring, while retaining effective control over delivery and compliance.

How PwC is assisting financial services organisations

PricewaterhouseCoopers can help companies to develop effective and sustainable frameworks for meeting the continuing changes in market reporting. We can also help organisations meet stakeholder demands for more credible and transparent disclosure.