CHALLENGES OF MIGRATING FROM NASB TO IFRS

Challenges, gains of migrating from NASB to IFRS
By NIKE POPOOLA
Monday, 17 Jan 2011
L-R: Fola Daniel, Olateru-Olagbegi, Jegede
The insurance sector has decided to embrace the International Financial Reporting Standard. NIKE POPOOLA analyses the impact the new approach will have on the industry’s financial outlook. As part of efforts to embrace international standards in insurance sector’s financial reporting, the National Insurance Commission recently introduced the International Financial Reporting Standards into the industry.
The new reporting method now overrides the provisions of the Companies and Allied Matters Act and the Nigerian Accounting Standards Board, which the insurance firms had been using.
The major aim of the new approach is to grow local insurance firms into international standards (companies) that can earn people’s confidence and attract foreign investors’ interest.
Under the new development, the insurance companies are expected to start their transition from January 2011, while insurance brokers will take their turn in 2012.
The commission has given insurers and reinsurers only three months to prepare for the transition – a directive described by stakeholders as placing operators in a challenging situation to quickly adjust to the regulator’s requirement.
According to the arrangement, NAICOM expects the companies to prepare dual accounts in 2011 and prepare IFRS-complaint accounts in 2012.
Embracing this new approach, however, is definitely a challenging one, which operators are trying to adapt to with the assistance of their regulator.
One of the reasons why it remains a challenge is that operators, in most cases, have yet to really understand the technicality involved in the method, at least, for them to build the necessary capacity for enhancing a smooth transition.
The Managing Partner, Sirius Associates, Mrs. Oluwakemi Adeniran, says IFRS refers to a series of standards, interpretations and pronouncement published by the International Accounting Standards Boards.
She explains that the relevance of this is to help those preparing financial statements throughout the world to produce and present high quality, transparent and comparable financial information.
According to her, the benefits of IFRS include improved management information for decision making; better access to capital, including those from foreign sources; reduced cost of capital and ease of using one consistent reporting standard in subsidiaries from different countries.
Other advantages, she adds, include facilitation of mergers and acquisition, enhancement of healthy competitiveness and efficiency in domestic and cross-border financial reporting.
Now that the sector is embracing the method, she lists some limitations that the industry may face to include shortage of personnel (who are technically competent), limited availability of personnel at affordable cost (in terms of both technical assistance and staff time) and time constraint.
Others are the difficulty in coping with rapid frequency and volume of charges in keeping pace with the new standards, transition adjustments and large scale disruption to staff and management time due to training and capacity building.
The Managing Director, Oceanic Insurance Group, Mr. Lafor Olateru-Olagbegi, says that though the companies are trying to adjust to the new accounting model, with time, they will be able to.
He notes that the former accounting model that the sector was used to did not encourage foreign investors because they found it difficult to understand it.
He says, “If we adopt the international practice now, investors will come and we will benefit from it in many more ways. Most investors do not understand our accounts. But with the IFRS, it is easy for any investor from any part of the world to take up your book and understand what you are doing. So, it is a right step in the right direction”
The Managing Director, NICON Insurance Plc, Mr. Emmanuel Jegede, says that insurance is an international business, and if the sector must move forward to the next level, then, the industry must comply with international standards.
He notes that this is a major reason why companies have to present their results based on the standard required by global community
He observes that the operators are learning to adjust quickly to the new accounting method.
He says, “When a new method is introduced, there will be challenges. Most of us are learning, and with time we will get to understand it better.”
The Commissioner for Insurance, Mr. Fola Daniel, says the commission is committed to the adoption of IFRS, not only because it is one of the initiatives of the insurance industry, under the FSS2020 programme, but also because it is an imperative for the recognition of the country’s insurers and reinsurers internationally.
While considering the short time that the road map allows for transition and the dearth of skills needed for it, he observes that many operators may be facing huge challenges over the estimated cost and appropriateness of the strategy to be adopted in the pursuit of a seamless transition.
The commissioner says, “Furthermore, we noted the urgency and importance of the project and thus decided to deal with it ahead of other major industry initiatives we had slated for 2011.”
For this reason, he adds that NAICOM decided to support operators by facilitating an arrangement that it hopes will ease a seamless transition to IFRS.
The NAICOM boss explains that the local standard seems out of date and may not be sufficiently comprehensive to form a basis for preparation of high quality financial statements.
The adoption of the IFRS, he notes, will result in high quality, transparent and comparable financial statements that are based on modern accounting principles and concepts that are being applied globally.
Speaking on the expectations from the new IFRS, Partner, Akintola Williams Delloite, Mr. Oduware Uwadiae, says that the transition to IFRS will help insurance companies to improve the sophistication of their risk management practices.
According to him, IFRS intends to help the companies arrive at a better economic view of their business portfolio, which will likely lead to improved management of the business.
He notes that IFRS provides an opportunity for firms to substantially improve internal controls, stressing that greater transparency may lead to greater levels of accountability for risk management practices.
Uwadiae says, “The increased transparency and greater disclosure-related risk, as introduced by IFRS, combined with capital adequacy frameworks, will lead to insurance companies being held to greater levels of accountability for their risk management practices.”
Changes in reporting due to IFRS, he explains, will empower investors and analysts, who will make easier comparisons across companies and hold management to heightened levels of accountability.
Explaining the effect of IFRS on life underwriters, he says the implementation of IFRS requires insurers to develop a deeper understanding of their products, by examining their entire books of business to enable the classification of products as insurance contracts or financial instruments.
He says as insurance companies increasingly become aware of these factors, the additional information flowing from the adoption of IFRS will lead them to properly price these embedded derivatives and do so at a fair value.
According to him, with the new accounting system, it is likely that certain life insurance products and annuities may be discontinued, redesigned or priced higher.
He explains that under IFRS, the modelling of liabilities, especially for non-life insurers, will become more complicated with the advent of discounting techniques.
He adds that companies offering long-term insurance products, such as general liability, commercial automobile, workers’ compensation and specialty lines of insurance that seek to cover the long tail lines of business will find the estimation and modelling of liability cash flows the most challenging, as these lines have weak observable market data, high volatility and potentially large payouts.
He says, “Further, as insurance companies provide more details in their financial statements regarding how risk is priced, for example, through increased disclosure related to the calculation of risk and service margins, assumptions and sensitivities based on actuarial modelling, the concentration and mitigation of risks and claims development, the pricing of risk will likely become more transparent.”