Firms face hurdles

…As IFRS 17 takes effect

(Last Updated On: November 17, 2022)

PHILLIMON MHLANGA

 

Zimbabwe’s insurance sector and the accountancy profession face hurdles as a new rule, the International Financial Reporting Standard 17 (IFRS 17) takes effect in a few weeks’ time, Business Times can report.

The complicated new standard was issued by the International Accounting Standard Board (IASB) and comes into effect in January 2023, replacing IFRS 4.

It comes into effect after nearly 23 years of development.

But players in the insurance industry, accountants, and actuaries, among others this week revealed that the standard is going to shake up Zimbabwe’s insurance sector.

They said IFRS 17 is more complex and costlier to operate.

Exacerbating the situation is that some companies had deferred implementing IFRS 9 meaning they will now have to adopt two complex standards at the same time.

William Marere, a preparer with First Mutual Life said: “It’s [IFRS 17] quite complex. As we were doing dry runs, it was quite hectic given Zimbabwe’s high inflation, multiple currency, and price changes, among other problems. The other problems included onerous contracts or future expected losses and integration of IFRS 17 tools to operating systems.

Also, the development of new assumptions in actuarial modelling and the development of IFRS 17 related KPIs as well as standard KPIs.

“We have engaged an independent consultant.”

An actuary, Tawanda Chituku, who has been assisting more than 15 companies on IFRS 17 standard said he has never found something “as complex as this standard (IFRS 17”).

In terms of modelling, insurance companies need actuaries for the first two years, he said. “The modelling journey is quite complex, which requires the classification of contracts, need to structure reporting accounts, changing systems and processes. There is also the issue of determining discount rate, risk adjustment for non-financial risk and issues to do with scoping. Zimbabwe is a very difficult environment,” Chituku said.

Another actuary, Tafadzwa Chiduza said there is a “big nightmare” in the market in terms of system challenges.

“The other problem is that even if one gets a vendor with the right system, the Reserve Bank of Zimbabwe takes a long time to approve applications for foreign currency. Therefore, most insurers in Zimbabwe are yet to acquire insurance systems to implement IFRS 17,” Chiduza said.

He said most companies use legacy systems, adding they were wary of the “level of investment that goes into the new system.”

“What’s the cost benefit? There are also those who asked for IFRS 9 deference. It now means that the company will now implement two standards (IFRS 9 and 17). This will be too costly. The cost of software systems is up to US$300 000. But the other nightmare is that foreign currency has been a challenge.

“Given where we are, my advice is that companies should engage consultants to run the numbers for them for a year or two years.”

The growing fears have led to calls by industry players to push for an extension.

But the regulator of the country’s accountancy profession, the Public Accountants and Auditors Board (PAAB), said that window has been closed.

“When we met the Minister (of Finance and Economic Development, Mthuli Ncube) yesterday (Monday this week), a position was taken, we are going to implement IFRS 17 standards by January. We have well trained accountants to implement the reporting framework,” PAAB secretary Admire Ndurunduru said this week

He said more energy should be expended on “bracing for the implementation of the standard”.

IFRS 17 will measure insurance contracts where losses are expected to be recognised.

By establishing consistent principles for the recognition, measurement, presentation and disclosure of insurance contracts, IFRS 17 represents a new era in insurance accounting.

It does this by combining current measurements of future cash flows with the recognition of profit over the period in which services are provided.

IFRS 4 did not require insurers to identify in a systematic way which insurance contracts were profitable or loss making except at a high level that involved significant discretion. This resulted in different companies offsetting profits on some contracts against losses on others in different ways, making comparisons challenging.

That is one of the new features of IFRS 17. It requires entities to first identify homogeneous risk portfolios then divide these into groups based on their profitability.

That makes it much more visible whether new business creates or destroys value based on IFRS 17’s conventions.

It is expected to come with complexities on the financial disclosures of insurers and profound operational impacts on all aspects of the companies, meaning that Zimbabwe insurers will need to implement significant technical and practical changes to current practices.

They need to completely overhaul their underlying models, financial reporting processes and systems, and transparency demands within their corporate governance structures.

It is expected that the way insurers will report income earned from life insurance business will change. They will not report future premiums earned from the life cover, creating a volatile environment for them financially.

The new rules are also expected to bring about radical changes whereby investment income, money put in stocks and government paper as invested will not be counted in the overall profits of the insurer.

Under the IFRS 17 model, insurance contract liabilities will be calculated as the present value of future insurance cash flows with a provision for risk.

IFRS 17 will also bring tax complexities.

“Zimbabwe is a very difficult tax jurisdiction. Now, with the coming in of IFRS 17 standard, you can imagine what we will be going through. There is going to be a change in the manner taxation in this country is going to be done,” MatrixTax CEO, Marvelous Tapera said.

He said the insurance tax regime is slightly different from that of an ordinary tax and “one thing for sure is that there will be a big impact from IFRS 17”.

An auditor with PWC, Clive Mukondiwa said: “We are the forgotten cousins. Auditors are not engaged at the right levels. To understand the (IFRS 17) standard is a bit complex. There is an expectation that come December 31, 2022, companies are required to provide disclosures on the impact of the new IFRS 17 standard. Failure to do so, will be taken as non-compliance.”

He said companies should “engage someone to provide independent assurance”.

“This means, there is a need for companies to engage audit firms to work with you and can help you to document your processes, just to help you with quality assurances and with decisions,” Mukondiwa said.

Old Mutual Zimbabwe audit committee chairman, Anesu Daka said: “As a director, there is a feeling that we have not prepared our stakeholders enough for what’s coming (IFRS 17 standard). That’s a big challenge.

“What’s really hard from a director’s point of view is the story that’s coming through. The insurance business is going down. There is poor insurance penetration level, and the poor performance of the insurance business is disturbing… Then the big question to be asked is are there enough disclosures to restore confidence as we implement IFRS 17 standard.

He said the other big issue was how to balance application of the standard and rules.

“This is conflicting at the same time. It’s quite an issue. We also have competing actuarial variations and different rates that the market is using. The policyholder will say are you not undervaluing my asset?”

Daka said the elephant in the room is that with IFRS 17 processes, “we cannot expect our audit fees to be the same”.

“The scope of the audit has changed, especially when you are going through all these,” he said.

A former IASB member, Darrel Scott said: “It’s a unique journey, different from others. There is a need to engage stakeholders about what is coming.”

 

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