Step through the likely impacts of IFRS 4 and IFRS 9, both of which have complexities that will require careful planning and execution.

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Chief Technology Office
Mark Sherwood – Finance Enterprise Architect
14June 2016
Impacts of IASB Accounting
Standard Changes under IFRS 4
(Phase 2) and IFRS 9

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IAS 39 is the current standard that deals with the recognition and measurement of financial assets and liabilities as well as
some non-financial items. IASB projects are underway to introduce a number of changes in the form of new standards
which will replace IAS39. The new standards are likely to have some significant impacts and will require careful
consideration and planning..
IFRS9 Financial Instruments
Following the financial markets turmoil of 2008 it was observed that losses against assets arising from the crisis did not filter
through in a timely manner and may also have exacerbated the scale of the crisis. The new standard, which will be
implemented in January 2018 brings changes to the recognition and accounting of assets, expected¹ loss credit impairment,
as well as updating (but not replacing) some Hedge accounting rules.
IFRS 4 Phase 2 – Insurance Contracts
IFRS 4 was first introduced in 2005 but the latest draft changes under Phase 2 are unlikely to be implemented much before
2020². Dealing with insurance contracts (i.e. liabilities) these changes are likely to be technically challenging.
Both IFRS4 P2 and IFRS 9 are likely to be resource heavy requiring significant investment around processes as well as
Actuarial & Finance system changes.
Note¹ - current reporting is on an actual loss basis so moving to an expected loss (i.e. forward looking) model is a major shift.
Note² - lack of convergence between implementation dates likely to create a volatility in the underlying statements
Background

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The following diagram illustrates the high level activities that feed both regulatory and financial reporting processes.
The new IFRS Financial Reporting requirements are significantly different from Solvency II Regulatory Reporting, therefore major changes are
likely to be required which will impact :
 Requisite Inputs and Outputs
 Systems & Processes
 Management Information
 Financial Reporting
 Internal Controls
 Staff (including management) training
Operational Impacts

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The high level data types, categories and particularly timings of inputs are unlikely to
change much but there may be changes in the level of granularity as when it comes to the
mappings & aggregations these will be materially different.
For example, asset feeds from custodians will come in much as they did before. This may
then be overlaid with other elements from Bloomberg or other similar market data. It is
generally accepted as good advice to make your existing feeds suitable for multiple bases
i.e. a multi-dimensional cube that fulfils all use cases.
Life and GI liability data extracts may need to be reviewed and changes made. Even where
no changes are required at the extract level the treatment of liabilities in terms of
accounting and actuarial processes will be very different and potentially complex to
embed.
Key Point
Any additional
requirements from
source systems (including
3rd party asset feeds)
should be built into
existing feeds to avoid
increases in cost and
make internal
reconciliations across
bases more
straightforward.
Impacted Source Systems
Based on your current estate it might look like this……..

5. Mappings & Aggregations
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There are likely to be changes in terms of the content of the data and this is due to the
same data-sets needing to be capable of being used across multiple bases and regimes –
e.g. across both financial and regulatory reporting. Whether or not the additional
granularity is in the existing feeds will need to be closely looked at.
The GL it will require a whole new set of hierarchies for the business entities for Group
consolidation. Some of this may be achieved via adjustment but it will be a sizeable task.
Accounting for financial instruments under credit impairment moves to an expected loss
basis (i.e. forward looking). Actuarial processes will also need changing because the
cashflows (and inputs to cashflow models) may be at a different granularity. Expense and
other models will also need to be developed or updated. One example is the Risk Margin
calculation which differs from the Solvency II approach although there are some
similarities whereby the IFRS Risk Margin offers Cost of Capital basis as one of three
alternative approaches.
Reporting Policies, Methodologies, Processes and Procedures – these will all need to be
in place – no small task!
Where the fun starts………
New Asset
Classifications
New Liability
Mappings
Business
Model
GL Account
Hierarchies
Solo to Group
Consolidation
GL Account
Hierarchies
GL Account
Structures
New Control
Framework
New
Methodologies
New Policies &
Procedures

6. Finance Systems
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IFRS will require changes to systems and models……..
Apart from the strong likelihood of significant development of your GL systems suite, there
will also be other downstream impacts.
Some of these impacts may include the need for new models to cope with some of the
concepts being introduced – particularly around the Risk & Residual Margins, Credit
Impairment, Expense models and Business Performance & Planning.
Short duration contracts are dealt with very differently from (e.g.) Solvency II. Insurers will
need to design systems to track the premium amortization whilst ensuring Solvency II
systems for claims liabilities separately identify claims for earned and unearned premium,
and pre and post-claim cash flows.
A major shift in emphasis is that IFRS measurement considers the characteristics of the
contract. Solvency II by comparison, is based on the nature of the legal entity
New Models?
e.g. Risk &
Residual
Margins
Actuarial Model
Updates
IFRS uses
different
cashflows

7. Potential Reporting Implications
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Something for CFOs to think about….
There are a number of potential outcomes as well as some certainties that will arise as a
direct result of the new IFRS changes, such as:
 Because IFRS 4 P2 and IFRS 9 are not being introduced at the same time this could create a
temporary volatility in the underlying financial statements where changes in assets
reporting will be implemented into financial reporting around 2 years before
corresponding liability changes,
 Businesses that do not routinely closely match assets and liabilities likely to see a volatility
in their income statement,
 Timings to produce IFRS income statement & tricky reconciliations, e.g. Solvency II P+L
(internal model) reconciled with the IFRS residual margins – less time available to do more,
 Other timing issues are that this is being introduced when (e.g.) Solvency II Solo QRT
reporting timescales are still reducing.
Complex
reconciliations
Managing
Analyst
expectations
Staff & Exec
training
Managing
Volatility
Solvency II still a
moving target

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At the S&A Group we know a thing or two about what good looks like….
The S&A Group has a wealth of hands on experience when it comes to enabling all aspects of Actuarial & Finance change.
We offer a full range of services from consulting to packaged services, training, and thought leadership through to
management and delivery of major programmes.
If you would like any further information then call us on 020 3753 5343 or visit www.thesandagroup.com where you can
find out more about our full range of services.