Mumbai:
In a matter of two years, the Indian life insurers will have to implement a new accounting regime, known as Indian Accounting Standard (Ind AS) 117, that will sweepingly change existing format of preparing their balance sheets.
The new Ind AS 117, scheduled to be implemented by Apr 2020, is currently being jointly prepared by the insurance regulator IRDAI and Institute of Chartered Accountants of India(ICAI). Earlier, the IRDAI had deferred the effective date for implementation of Ind-AS accounting model in the insurance sector to April 2020 from April 2018.
Currently,a 20-member committee headed by the two chairmen-one each from the insurance industry and ICAI- is working on the implementation issue as well as revised format of financial standards for the life insurance industry. Ashutosh Pednekar is representing the IRDA while SB Zawre has been duoted by the ICAI in the panel.
The committee would be submitting its report by December 2018.
Though,globally the new accounting standard will commence in 2021, in India it will kick in by 2020.
ICAI has already issued an exposure draft on the issue for which comments by the industry players can be submitted by April 30, 2018
“The industry will have enough time to prepare for and to make changes in their systems and business processes in line with the new accounting system , said an official of the joint panel , who does not want to be named. .
"We are working closely with IRDAI on the issue," he added.
Talking on the impact of the new accounting norms, he revealed that big changes are likely to happen qualitatively on the way premium is accounted for in the life insurance industry.
Explaining it further, he said that as of now, premium is perceived to be an income for the life insurance industry. The new standard will completely change the way in which revenue of insurance entity is recognized.It will replace the premium known as income by contractual service margin and finance expense and risk adjustment for insurance.
“Post the Ind AS 117, accounting of premium norm will depend on new method of calculation of revenue. It will split what is a profit for a life insurance company and how much amount is meant for investment. Timing will also change. Whatever a life insurer receives in a particular year, will be treated as income in the existing system. However, this will be allocated over a period for an insurance cover.At the moment, insurance, liability for claim is reached by actuaries at current value for calculations, the rates for which are provided by the IRDAI, which are conservative,'' said ICAI sources.
In future, it will be linked to the prevailing market price. It will help both, customers and shareholders (or investors) to know what is the liability based on current market rate, they added. .
For example, at present if the calculations are done by keepinng the 10-year G-Secs in mind. However, rates of these instrument keep varying.Now the varying rates of G-Sec will also be factored in while arriving at the rates for guaranteed returns in the Ind AS 117 frame-work.
“ We are also there on the IRDAI working group on new standards of insurance contract .There are lots of representatives from the insurance industry in the group,’’ said ICAI sources.
The IRDA while decoding to defer the implementation Ind AS 117 had concluded that implementation of Ind AS in the present form was expected to lead to a position where assets would be valued on fair value/market value basis and liabilities would continue to be valued as per the existing formula based approach.
“This would lead to mismatch in the asset and liability valuation and would also cause volatility in the financial statements of the insurance companies.'' the insurnace regulator had commented.
Additionally, IRDA had observed that the compliance costs will have to be incurred twice-once immediately on implementation of Ind-AS and second when IFRS 17 would be implemented in the country.
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