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A busy time – with more work to come

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By Ty Faulds, FCIA

For anyone working in a financial reporting role, you are undoubtedly paying a lot of attention to any developments concerning International Financial Reporting Standards (IFRS). As we close out 2010 and move forward into 2011, I thought this would be a good opportunity to remind you about the various activities related to IFRS that have kept the Practice Council occupied.

Although IFRS 4 Phase 2 has been generating a lot of discussion lately, I wanted to remind you that Phase 1 comes into effect on January 1, 2011. Last year, the Practice Council conducted a review of the various actuarial notes produced by the International Actuarial Association (IAA), and adopted several of these documents as educational notes and research papers. I would encourage you to review the April 2009 (e)bulletin article by Jacques Tremblay (my predecessor as Practice Council chair), which provides a good summary of our work on this initiative. In addition, I would also refer you to the report issued by the IFRS Contract Classification Working Group (an industry-sponsored group), which provides a useful discussion on how Canadian insurers have classified common Canadian insurance products under IFRS. To further supplement our guidance on this topic, the Practice Council released two additional research papers this fall, addressing disclosure requirements for insurance contracts. Separate papers were produced for life and for P&C business.

In December 2005, the Auditing and Assurance Standards Board issued Guideline AuG-43, Audit of Policy Liabilities of Insurance Companies. I’m sure that many of you have since become quite familiar with the requirements of this guideline. Because IFRS will be replacing Canadian accounting standards, a replacement process for AuG-43 needed to be developed. The CIA has been working with the CICA on the development of the Non-authoritative CICA–CIA Guide to Audits of Financial Statements that Contain Amounts that have been Determined Using Actuarial Calculations. This guide is currently moving through the approval processes of both the CIA and CICA, and will be released as soon as possible once approved.

One of the more obvious impacts of Phase 1 is the treatment of reinsurance on financial statements. Under IFRS, reinsured business must be reported on a gross basis, with the reinsurance recoverable shown as a separate item. Given that CALM will continue to be in effect at least until Phase 2 is implemented, additional guidance was needed here, as the calculation of a gross CALM liability may not be straightforward. To that end, the Practice Council has recently issued an Educational Note on the Valuation of Gross Policy Liabilities and Reinsurance Recoverables.

Looking ahead to Phase 2, much of our work will depend on the final version of the International Financial Reporting Standards governing insurance contracts. The IASB issued an exposure draft in July, and the CIA completed our response in November. The final version of the standards is not expected until at least June of 2011. Although several aspects of the exposure draft were discussed, there were four primary areas of interest for us:

  • The discount rate on contracts whose cash flows do not depend on the performance of specific assets;
  • The limitation to three specific methods for determining the risk adjustment;
  • The residual margin; and
  • Unbundling.
Depending on the direction of the final standard, the Practice Council recognizes that additional guidance will likely need to be produced in anticipation of the formal implementation date, which is targeted to be in 2013.

A key determination will be to decide what needs to be covered through formal Standards of Practice, and what will fall to other guidance, such as educational notes and research papers. The CIA plans to work very closely with the Actuarial Standards Board (ASB) to ensure this allocation is done correctly. As an ex officio member of the ASB, I will be able to keep a close watch on developments at that end. I should mention that the ASB has established a working group, chaired by Mike Hale, to make a first assessment of what additional guidance will be needed. If you participated in the CIA webcast on December 8, you will be up to speed on their latest thinking. Obviously, anything outside of Standards of Practice will fall to the Practice Council to develop. We also intend to closely monitor activity at the International Actuarial Association level, to ensure we are apprised of the latest discussions in that forum.

It appears that 2011 will continue to present the Practice Council with several projects of interest. I would like to thank everyone who contributed to our efforts in 2010, and wish everyone a smooth and relatively uneventful year end.

Ty Faulds, FCIA, is Chair of the Practice Council.  

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