The International Accounting Standards Boards (IASB) has outlined why global harmonised standards are needed for insurance contracts accounting.

In a speech given at the EY-IFRS Kongress in Berlin, IASB Chairman Hans Hoogervorst touched on the organisation's work to establish a global standard for insurance contracts accounting: “The one remaining major project on our agenda is to finish the new accounting standard for insurance contracts.” He said that work on this has been in progress for several years and the new standard will replace the current IFRS 4.

3 reasons why global accounting standards are needed

Hoogervorst gave the following examples of why better insurance accounting is needed:

• There is little comparability between insurance companies around the world. For example, an insurance company that uses one national GAAP for the subsidiary of a group, while using another GAAP for its statutory financial statements, will produce very different results in terms of its revenue, operating income and total equity. Hoogervorst says that currently used GAAP for insurance contracts lack quality.
• Some of the accounting practices used for insurance contracts around the world are at odds with what are considered generally accepted accounting practices for all other sectors of the economy. Hoogervorst said: “Many insurance premiums contain a deposit component because many insurance products combine insurance protection with investment. More than a few insurance companies recognise all deposits they receive as revenue. Can you imagine a bank or an asset management company doing that? Moreover, premium revenue is often recognised on a cash basis, which is at odds with the general principles of revenue recognition.”
• Another problem is that, in many countries, insurers do not use up-to-date interest rates for insurance liability and often they use historical interest rates.

The IASB intends to publish the new insurance contract accounting standard as soon as possible and, while it will affect accounting for insurance companies, their customers are also likely to notice a difference and – hopefully – benefit from a more standard global insurance industry.