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Wednesday, 17th April 2024
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Financial reporting environment for insurers, reinsurers and banks, has never been more challenging Back  
Dargan Fitzgerald and Kieran Kelly give an overview of developments at a recent seminar on financial reporting for international banks, international insurance and reinsurance companies, and other financial institutions.
FFFinancial reporting for international banks and other financial institutions
The focus of the seminar was to assist finance professionals face the major challenges of IFRS, US GAAP and Sarbanes-Oxley 404 as well as updating for changes governance standards, Irish company law and allied matters.

Sean Fitzpatrick, chief executive officer of Anglo Irish Bank, in opening the seminar, drew comparison to the great feats of sporting prowess that have taken place in Croke Park over many years and exhorted the finance professionals in the audience to be inspired!

The importance of accounting information as the ‘bedrock’ of transparency and accountability was central to a presentation by Alastair Clark, adviser to the Governor of the Bank of England. The key issue for financial reporting in Clark’s view is the trade-off between the increasing level of detail and accuracy required in published financial reports versus the ability of most users to understand and absorb information provided. Clark also commented that the current trend away from professional judgment as an acceptable basis for decision making of auditors and finance professionals was doing a disservice to users of financial information.

Fergus Condon, a senior manager with Ernst & Young, provided delegates with an overview of the most important recent important developments in International Financial Reporting Standards (IFRS) including those impacting share-based payments, financial instruments and derivatives, business combinations and transition to IFRS reporting. Condon also dealt with provisions of the Companies Auditing and Accounting Act 2003, and the recommendations of the Committee of European Securities Regulators.

The Sarbanes-Oxley Act has had significant impacts on banks and financial institutions with US listings, and Christine Gatti, a director with Credit Suisse, described the approach her bank has utilised to comply with two of the Act’s most challenging aspects Sections 302 and 404. The participants on the panel discussion that followed supported Christine’s key themes of executive sponsorship of the projects and the utilisation of a comprehensive agreed project plan. A panel member Tony Schatzel, a partner with Ernst & Young Dublin, drew on his experience working with US organisations to support his view that the detail in complying with SOX can detract from good risk management practice.

Accounting convergence was the theme of a presentation by Philip Newman, a financial reporting associate with IASeminars. Newman kept delegates entertained by interspersing his very important observations on the barriers to convergence, with amusing illustrations and cartoons. These served to emphasise the absolute importance of integrity in financial reporting. This can be lost in ever more complex rules based accounting.

Con Horan, head of banking supervision with the Irish Financial Services Regulatory Authority (IFSRA) outlined the latest developments in Basle II. Horan also welcomed the enhanced emphasis on internal control and compliance as set out in the Sarbanes Oxley Act, the recent Irish (Auditing and Accounting) Act and in the Central Bank and Financial Services Authority Bill, currently going through the D?il. Industry consultation is occurring on the implications of the Irish legislation.
EBS Building Society is one organisation which is ahead in its planning for IFRS conversion. Enda Devine, head of finance at EBS, shared with delegates his insights on the issues for that organisation with IFRS. The breadth of the task facing organisations in converting from the existing basis of accounting was set out succinctly by Devine.

The reaction in the boardroom to IFRS and regulatory developments has not been uniformly positive according to Peter Fitzpatrick, group finance director with Irish Life & Permanent. Fitzpatrick described some of the frustrations in explaining to board members and investors what IFRS means to Irish Life & Permanent in the context of evolving standards and missed deadlines for IAS 39 finalisation. Whilst accepting the merits of global accounting convergence, Fitzpatrick questioned whether too much is being attempted in too short a time frame. IFRS when placed alongside Basel II is generating for companies huge difficulties and the question of ‘where is the value’ has not been satisfactorily answered.

Kieran Kelly is banking and financial services partner at Ernst & Young.

Financial reporting issues for international insurance and reinsurance companies
This year’s annual seminar was particularly appropriate, with the landmark issue of IFRS 4 Insurance Contracts taking place just a few weeks beforehand. The financial reporting environment for insurers and reinsurers has never been more challenging, what with multiple reporting under different GAAP regimes, including IFRS, onerous regulatory and compliance initiatives and new requirements for governance and control.

Following a welcoming address by Denis Hevey, CEO of the Insurance Institute of Ireland, Patricia Plas, a director of the Economics and Finance Committee of the European Federation of National Insurance Associations, gave a comprehensive presentation of the new rules in IFRS 4, focusing on the definition of insurance, embedded derivatives and the concept of unbundling deposits, particularly in relation to financial reinsurance contracts. She also highlighted the topics, which have been deferred to Phase 2 of the insurance accounting project under IFRS, namely, the valuation of assets and liabilities under fair value principles. She also explained the two new disclosure principles, the first being the explanation of reported amounts and the second the amount, timing and uncertainty of cash flows. Finally, Plas highlighted the link between the Solvency II project and IAS/IFRS for insurance contracts and noted that Solvency II has the aim of being consistent with Phase II of the insurance contracts project. Solvency and financial reporting will, therefore, be inextricably intertwined going forward and this is a major watch list item for the insurance and reinsurance financial reporting community.

Ian Hague of the Canadian Accounting Standards Board addressed the complex changes to IAS32 and IAS39, which have recently been announced. These non-insurance standards are particularly important to life assurers where, under the new IFRS 4 rules, many contracts will be reported as financial instruments rather than as insurance. The bad news is that the insurance reporting community will soon have to understand as much about IAS32 and IAS39 as their colleagues in banking and treasury!

Focusing on the practicalities of implementing an IFRS project, Mark Swallow, chief accounting officer with Swiss Re, gave a fascinating insight into Swiss Re’s concerns on behalf of the insurance industry. These concerns relate, in the short term, to the volatility of reported results but, in the medium term, to the added complexity of financial reporting which may form a barrier for insurers in trying to raise capital from the markets.

Marese Hussey, director in the actuarial practice in Ernst & Young, ran through some of the more technical aspects of interest to actuaries, such as product classification issues, discretionary participation features and the principles for valuing unit linked investment contracts. She also highlighted the wider business implications, such as performance measurement, pricing, product design and the need for clearer communication with stakeholders.

A welcome opportunity to dialogue with the regulator was provided by Patrick Neary, prudential director of IFSRA. Emphasising that IFSRA wishes to see and rely on excellent governance in all aspects of its regulated entities, Neary acknowledged the challenges posed to this model by recent, much-publicised failures of compliance and ethics in the financial services industry, whether in Ireland or elsewhere. He stressed that, as regulators, IFSRA would respond to the perceived risk profile of companies under their supervision and that they wished to work closely with actuaries, internal and external auditors and compliance functions in exercising their supervision. The provision of more and better information to consumers, whether the industry likes it or not, is part of IFSRA’s strategic approach to consumer protection and will be a feature of IFSRA’s thinking in this area.

Finally, in the popular ‘Views from the Boardroom’ session, Tony O’Riordan, group finance director of Hibernian, Ireland’s largest insurance group, highlighted the need for change in global finance functions. Presenting historical data is no longer enough and the challenge is to provide relevant and timely information to enhance business decision making for the future. There is now a complex mix of pressures on the finance function, from regulators, accounting standard-setters, investors and from the organisation itself. The reality is that these pressures are set to intensify over the next few years and the important thing is to recognise this and to change the finance function to enable it to respond.

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