PFRS 9: Have insurers got this covered?
Credit to Author: The Manila Times| Date: Thu, 17 Jan 2019 16:18:06 +0000
Insurance companies in the Philippines have been preparing for the biggest shake-up for insurance accounting – the Philippine Financial Reporting Standards (PFRS) 17, Insurance Contracts. After assessing the readiness of insurers, however, the Insurance Commission (IC) has further deferred the effectivity of PFRS 17 to Jan. 1, 2023, making it the first accounting standard in the Philippines with deferred implementation.
This unprecedented move by the IC is welcomed by Philippine insurers due to PFRS 17’s complexities in accounting for insurance liabilities. While insurers are celebrating this news, they should not lose sight of the parallel standard for their investments and other financial assets–PFRS 9, Financial Instruments. While similarly deferred for most insurers, adoption of PFRS 9 would result in additional complexities.
Fortunately, the PFRS 9 road that insurers are also about to embark on has not been untrodden. The banking industry has been looking into PFRS 9 since it was finalized in 2014. Given the wealth of experience that may be gleaned from multiple PFRS 9 projects in the banking industry and available public information, it would be good to highlight some important considerations that insurers must look out for.
Refining decisions made during implementation needs time
Based on the quarterly filings of top 10 listed banks (based on asset size) in the Philippines, eight of them have changed their calculations of the PFRS 9 transition impact amount (i.e., effect on Jan. 1, 2018 equity) from their first quarter to their third quarter filing.
The change varies from a five percent increase to as much as a 200 percent decrease from the initial amount. While there are no further information available to explain these changes, these can be attributed to the refinement of key judgments and decisions made during implementation. Hence, when insurers plan their implementation strategy, it is important that time is allotted to perform a parallel run of PFRS 9 to allow improvements before transition. This will enable insurers to form a more stable and refined PFRS transition story for their stakeholders.
The impact is unpredictable
Considering the areas that changed in PFRS 9, it was expected that there would be a general decrease in the equity of banks due to an increase in impairment on loans and receivables. However, their quarterly filings reflect mixed results across the board. Some registered an increase in total equity by as much as P10.5 billion or five percent of total equity while others decreased their equity by up to P2.7 billion or one percent. This is a clear indication that when adopting PFRS 9, the “devil is in the details” and going through a complete PFRS 9 assessment will be the best approach to eliminate uncertainty upon implementation.
Assess indicators of potential increase in complexity
Insurers that invest in corporate bonds, foreign debt securities, and other private debt securities would also see increased complexity for a tricky aspect of PFRS 9: determining whether debt securities not carried at fair value through profit or loss have contractual cash flows that are solely payments of principal and interest (SPPI). These investments may have a multitude of features that may not be consistent with SPPI and trigger a different classification compared with what is anticipated in their business model assessment. In contrast, investments in Philippine government securities typically pass the SPPI test due to their less complex features. For investments in unlisted shares of stocks, those will likely be measured at fair value as the cost exemption allowed in the past entail stricter requirements under PFRS 9.
People outside of finance should be involved
Involvement of the investments team, whether outsourced or internal to the company, is critical during the implementation process to make sure they are aware of the accounting consequences of operational decisions. For example, if securities carried at amortized cost are sold in a manner inconsistent with its business model, this may trigger a change in the business model and result in a change in classification of future securities that will be added to that portfolio. Another example would be how business managers monitor the performance and risks in the portfolio and how the compensation policy may influence the business model of the portfolio, which will drive the classification of that portfolio.
Tying it all together
The effect of PFRS 9 to banks is not yet in full swing; it will be finalized upon filing their 2018 financial statements. However, even with the limited market data available, it is apparent that the financial impact is huge and how you get there is difficult.
With the combined risk of adopting two new complex accounting standards, rising net worth requirements and upcoming changes due to the tax reform program, insurance companies cannot afford to put a pause in their implementation efforts – to stand still is to fall behind.
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Dexter DJ V. Toledana is an Assurance Director of Isla Lipana & Co., a member firm of the PwC network. For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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