Buried among a raft of recent media releases on ASIC’s web site is one that may not have attracted much attention - other than from insurers, their audit engagements partners and folks that monitor insurance companies for a living.
Accounting for insurance contracts is going to be shaken up and the corporate regulator is giving companies, their directors and others early warning about the impact of the accounting standard.
This is the kind of media release that sometimes goes unnoticed because it contains language that regarded by some people as gobbledegook.
It is an extremely important release, however, because the corporate regulator uses these messages to start the regulatory enforcement process.
Before you grumble, swear and throw things at your computer monitor at the observation I make above you need to read the media release carefully.
The corporate regulator urged people to begin the process of planning for an accounting standard that will become effective for reporting periods beginning on or after1 January 2023.
It seems like a long time, but it is not. I vividly recall touring the country with the Finance and Treasury Association when the international accounting standards were being introduced. The adoption announcement was made in July 2002 by the Financial Reporting Council.
I spoke in front of several audiences of banking types and found myself dumbfounded when some older accounting types in financial services institutions dismissed the introduction of IFRS by 2005 as being important because they were retiring in 2004.
That was absolute poppycock because the remark completely ignored the fact that an adoption of a new standard also requires the hard yards to be done on systems changes and then calculation of comparatives so that a company complies with the accounting standards from the date they become effective.
Those remarks were most dismissive of the seriousness of the adoption of a new body of standards because it was clear that some people did not take the challenge of moving to a new body of material seriously.
I should add that most people I encountered on that roadshow and others I did for various organisations at that time were keen to get it right and wanted to position their organisations as leaders in compliance and governance.
But it is the lack lustre attitude of some folks in the finance sector that I saw on that trip up the East coast that got me rather disturbed about the way some people treat compliance and getting ready for it.
Change is inevitable but when the grey haired, more experienced practitioner in a corporation looks at an issue and says ‘I’ll happily leave it to the next guy’, we have a problem. Don’t be that person. That is unhelpful.
Take the date mentioned by ASIC – reporting periods beginning on or after 1 January 2023 – and work backwards. Assume you are an entity in the sector that reports on a calendar year basis for the purpose of this discussion. The 2023 annual report would have to comply with the new accounting standard and the comparative numbers drawn from 2022 need to be considered as well.
It means that a company needs to be well on the way in planning for the adoption of the new standards during 2021 so that they fully comprehend how this new insurance standard is going to impact the way the company’s financial position and financial performance will look.
There is truth in the observation that insurance accounting in Australia is well ahead practice overseas, but this does not give people a leave pass from making sure they are ready.
A range of issues are set down in the media release by ASIC. These issues are typical of areas companies must consider when analysing insurance contracts.
People in relevant roles in companies will need to work out what contracts are affected by the new standard and whether the valuation of contract liabilities are realistic. The determination of the latter will depend on a series of factors including but not limited to past experiences, changes in the market, and court decisions.
The list rattled off by ASIC covers measurement, groups of contracts and a range of other issues including what must appear in disclosures prior to adoption and then post-adoption.
It is a document that companies involved in any form of insurance product should look at and then talk to their accounting experts to determine what the impact of the standard will be on them.
Something else is going on here, of course, because this is not just a public service announcement to tell company directors, senior management and their chief calculator drivers to be nice rather than naughty.
The regulator is issuing statements like this to protect itself so that it is in a position to be able to tell people they were warned about the coming of the effective date of the new standard and were provided a checklist of things they should consider.
This also empowers corporate accounting policy staff, external auditors and external financial reporting advisers with a ‘big stick’.
These media releases form a part of materials distributed to clients in order to get the client to pull their finger out and get moving.
A media release like this should never be ignored by anyone because it is the first shot across the bow fired by the corporate regulator and aimed squarely at a sector the needs to ensure it complies with the accounting standards.
A board of directors and senior management of a company will only have themselves to blame of problems arise because ASIC has already started its paper trail.