Road to IFRS

North American Insurance Conference, November 2007, Florida

Canadian insurers need to keep their eyes on the clock as the 2011 deadline for Canada to adopt International Financial Reporting Standards (IFRS) quickly approaches.

Neil Parkinson, the national director of KPMG’s insurance industry practice, told delegates of the North American Insurance Conference in Florida that Canadian insurers preparing for IFRS might learn from the experience of European insurers. In particular, he observed that European insurers took two to three more years than initially planned to rebuild data models in order to comply with the IFRS standards.

WHEELS BEGIN TO TURN

IFRS is a single set of globally-accepted, high-quality accounting standards issued by the U.K.-based Inter- national Accounting Standards Board. What sets IFRS apart is its principles-based set of standards, as opposed to the rules-based standards employed in both the U.S. and Canadian GAAP systems.

However, the Canadian Accounting Standards Board in 2005 announced a directional change, favouring the use of IFRS standards over the use of U.S. GAAP standards. Canada established a fixed deadline of 2011 to adopt IFRS standards, and although the U.S. Federal Accounting Standards Board has announced an “intention to converge” with IFRS no deadline has been set. Parkinson suggested that if the U.S. were to jump on the IFRS bandwagon officially, that could slow down and delay Canada’s progress to implementation by possibly a year or two.

The U.S. Securities and Exchange Commission (SEC) has issued statements indicating it is leaning towards convergence with the IFRS method, Parkinson said. These statements include:

* a message that a single set of globally accepted accounting standards is desirable;

* a proposal to eliminate the requirement to reconcile to U.S. GAAP for foreign IFRS filers; and

* consideration of allowing domestic S.E.C. registrants to use IFRS.

LESSONS LEARNED FROM EUROPE

When financial results began to be issued on an IFRS basis in Europe, analysts liked the additional disclosures required by IFRS, Parkinson noted. But in some instances, since the IFRS only requires restatement of prior-year figures, European insurers had to rebuild their models; this has resulted in losing some compatibility with their historic data. In many cases, Parkinson said, European firms that moved to the new system “are still trying to build systems after using spreadsheets and similar stopgap measures to get through implementation.”

For Canadian insurers, the lesson learned is to get started preparing for IFRS now. Parkinson said by the middle of this year, Canadian insurers should already have assessed training and systems needs, as well as the impact on internal control certifications and “planned a conversion path.”

By 2009, a project team should be mobilized, training and communications plans developed, and the required resources identified, quantified and secured, Parkinson said. Between 2009 and 2010, these plans and changes should be put in place. Insurers should be renegotiating agreements and modifying internal structures, converting budgeted results and building and upgrading the necessary tools, Parkinson said. Once these steps are completed, the insurer still has the final year before the 2011 deadline to test the conversion and make any necessary tweaks and adjustments.

“This is the single biggest change ever to financial reporting, so don’t underestimate the scale of the undertaking,” Parkinson cautioned. “It affects educators, preparers, auditors and the investment community.”