IFRS: NAICOM identifies errors observed in operators’ accounts

 

 

Chuks Udo Okonta

 

The National Insurance Commission (NAICOM) has outlined the mistakes in the 2012 International Financial Reporting (IFRS) compliant financial accounts submitted by some insurance operators.

 

In a circular tagged: Common issues observed in the pre-submission review of 2012 IFRS financial statements, sent to all insurance companies, NAICOM said as part of the steps embarked on to facilitate the seamless finalisation of IFRS-based financial statements and statutory returns for the year ending 31 December, 2012, all insurance and reinsurance companies whose financial statements had been audited were invited to take advantage of its IFRS help desk facility for a risk-free review of their IFRS conversion outcomes.

 

The commission noted that in the last few weeks, it has considered the work of a good number of companies that have responded to this call, adding that the circular was issued to draw the attention of companies that are yet to submit their returns, to the major mistakes and areas for improvement which had been revealed so as to be guided accordingly.

The circular reads:  Company information; a. Principles: i. Information should be presented in a logical manner.

ii. IAS 1.138 (b) requires, if not disclosed elsewhere in information published with the financial statements, a description of the nature of the entity’s operations and its principal activities.

 

b. Gaps: i. Placement of “Company Information”: The decision to present the accounting policies before the primary financial statements resulted in the retention of “company information” as part of the other notes, presented after the primary financial statements. However, as “Company Information” contains contextual details( such as operations and principal activities) that are critical to the appreciation of accounting policies, the section of “company information” ought to be placed in the same section as accounting policies, before the primary financial statements.

ii. Description of the entity's operations and principal activities: The description of the nature of the entity’s operations and its principal activities is incomplete. While the description of operations is scanty, most financial statements reviewed did not describe the company’s principal activities.

 

c. Improvements Recommended i. Company information and accounting policies should be place before accounting policies and titled “Company information and accounting policies”.

ii. information on “operations and activities” for insurance business should incorporate the following 1. Business acquisition

2. Underwriting

3. Claims

4. Investments

 

 

d. Information on other businesses should be guided by 1(c)(ii)

2. EXPLANATION OF TRANSITION TO IFRS

 

a. Principles: Reporting entities are required to “present information about the basis of preparation of the financial statements and the specific accounting policies used” In this regard being the year of first adoption, Companies are expected to provide information on the basis of the conversion of financial statements prepared under Nigerian Gap to IFRS. This is governed by IFRS 1 First time adoption.

 

b. Gaps Observed: We noted the following gaps in this area: i. Transition Adjustments: Some companies did not indicate which of the following adjustments required by IFRS 1 (where applicable) made. 1. Nigerian GAAP assets and liabilities derecognized :

2. Assets and liabilities not recognized under Nigerian GAAP now recognized.

3. Items in Nigerian GAAP Balance sheet reclassified into appropriate IFRS categories.

 

ii. Mandatory exceptions/ Optional Exemptions: The mandatory exceptions applied and optional exemptions adopted with respect to the requirement on retrospective application of IFRS were not identified and or explained. When identified or specified, they were included in the other notes instead of accounting policies where they belong.

iii. Mentioning of disclosure requirements of IFRS 1: The following disclosure requirements of IFRS 1 as may be relevant to the company and provided in the notes to the financial statements were not mentioned. 1. Reconciliations of equity reported under Nigerian GAAP to equity under IFRS, both as at a. 1 January 2011 ( for consolidated Accounts, group and parent )

b. 31 December, 2011( for Consolidated Accounts, group and parent )

 

2. Reconciliations of total comprehensive income for the year 2011 under the Nigerian GAAP to total comprehensive income under IFRSs for the same period.

3. Explanation of material adjustments that were made, in adopting IFRSs for the first time, to the balance sheet, income statement and cash flow statement (IFRS 1.25).

4. Errors in Nigerian GAAP financial statements discovered in the course of transition to IFRSs (IFRS 1.26).

5. Any impairment losses recognized or reversed in preparing the opening IFRS balance sheet [IFRS 1.24(c)].

 

iv. In the case of items b (iii) (1) - b (iii) (3), sufficient information was not provided. Some presentation formats were deficient and or the explanations of adjustments were not satisfactory.

 

 

c. Improvements Expected i. All information required by IFRS 1 that are relevant to each company should be provided as part of the basis of preparation of the IFRS financial statements in the section for accounting policies. Only schedules containing details of their impact and actual disclosures should be included in the Notes to Accounts section. Where they are not relevant, this should be stated. This will assist the user in appreciating changes that have been made as a result of transition to IFRS.

ii. Presentation Formats: In order to assist in addressing the issues concerning presentation in b(iv) above, an illustrative format ( for statements and related notes) for IFRS transition reconciliation and adjustments is attached for guidance

 

 

3. NEW STANDARDS, AMENDMENTS AND INTERPRETATIONS

 

a. Principles: IAS 8.30 requires reporting entities to disclose information that will enable users understand the effect of those IFRSs and or amendment issued but not yet effective and not adopted.

 

b. Gaps: Most companies presented information about specific item but failed to meet the requirement of IAS8.30 and IAS8.31. The statement by some Insurance companies that they were in the process of determining the impact of any or all of these standards are inadequate. Some of such statements are made erroneously in regard to standards which are not relevant to the reporting period as their effective dates were from January 1, 2013.

 

c. Improvements Expected: Complete compliance with the requirements of IAS 8.30 – 8.31. The following should be disclosed i. The title of the new IFRS

ii. The nature of the impending change or changes in accounting policy

iii. The date as at which it plans to apply the IFRS initially; and

iv. Either 1. A discussion of the impact that initial application of the IFRS is expected to have on the entity’s financial statements; or

2. If that impact is not known or reasonably estimable, a statement to that effect.

 

 

 

4. SEQUENCING OF ACCOUNTING POLICIES

 

a. Principles: IAS 1.113 prescribes that reporting entities “as far as practicable, present notes (including accounting policies) in a systematic manner”. For accounting policies, apart from items affecting the financial statements as a whole (e.g. consolidations and insurance contracts), a systematic presentation would be the order in which they appear in the financial statements.

b. Gaps: i. Accounting policies were not presented in logical sequence in line with the contents of Financial Statements. Items common to all financial statements and those peculiar to statement of financial position and statement of comprehensive income are mixed up.

 

 

c. Improvements Expected: The accounting policies should be in sequence of relevant line items as contained in the primary financial statements. Except where the nature of the item concerned makes it impossible, accounting policies should be presented in the following broad sequence with items for each financial statement being presented in the sequence of their presentation:

 

i. General policies.

ii. Policies on items in statement of financial position.

iii. Policies on item in the statement of comprehensive Income.

iv. Polices on items in the statement of cash flows.

v. Policies on items statement of changes in equity.

5. COMPLETENESS OF ACCOUNTING POLICIES

 

a. Principles: i. Accounting policies should provide information that will assist users in understanding how transactions, other events and conditions are reflected in reported financial performance and financial position.

ii. Disclosure of particular accounting policies is especially useful to users when those policies are selected from alternatives allowed in IFRSs.

 

b. Gaps: i. The accounting policies for some material items or transactions reported both in the financial statements are not disclosed. In particular, the requirement for the hypothecation of Assets is not mentioned as a requirement of the law.

ii. Accounting choices made from options permitted by IFRS were not disclosed.

 

c. Improvements Expected: i. All line items in the primary financial statements are expected to have underlying accounting policies.

ii. The requirement for the hypothecation of Assets as well as their implications and their manner of disclosure in the notes should be mentioned under the accounting policies.

iii. Where a compound name is used for various category of items of assets or liabilities, such as Property, Plant & Equipment (instead of land, building, Equipments, etc), Insurance Contracts Liability (instead of Unearned Premium Reserve, Outstanding claims Reserve, Unexpired Risks, etc); the accounting policies for each of the categories should be disclosed.

iv. All accounting choices made from options permitted by IFRS should be mentioned in accounting policies.

 

 

6. CRITICAL ACCOUNTING ESTMATES AND JUDGEMENTS

 

a. Principles: Provide relevant information that will assist users understand critical accounting assumptions, sources of estimation uncertainty and judgments that management made in measuring carrying amounts and applying accounting policy that may have the most significant effect on assessment of the financial performance or position

b. Gaps: Inadequate disclosure of critical accounting assumption, sources of estimation uncertainty and judgment’s that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognized in the financial statements

c. Improvements Expected: i. Disclose under accounting policies, those Judgments that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements;

ii. Disclose under accounting policies the nature of assumptions and other sources of estimation uncertainty that relate to the estimations that require management’s most difficult, subjective or complex judgments; that have a significant risk of resulting in a material adjustments to the carrying amounts of assets and liabilities within the next financial year.

iii. The disclosures should be presented in a manner that would help users of financial statements to understand the judgments that management made about the future and about other sources of estimation uncertainty.

 

 

7. TRADE RECEIVABLES

 

a. Principles: i. Only trade receivables based on actual and valid transitions should be incorporated in the statement of financial position.

ii. The most reliable evidence of existence of debtors are when their debts are settled after the end of the reporting period or the existence of a written confirmation of indebtedness by the Insured or a Broker in response to either a circularization letter or a reconciliation exercise.”Broker’s confirmation of indebtedness will be acceptable”

iii. There is a general market presumption that any premium debt above ninety (90) days is impaired. By these rule, all premiums not received after this period can be taken to be impaired, unless there are evidences of their collection after year end or history of proven payment pattern by particular debtors.

iv. By operation of the law, all budget allocation for recurrent expenditure on Government Ministries, Department and Agencies( MDA) other than those with independent sources of funding, that are not spent by end of each fiscal year are expected to be returned. Thus any premium due from such organizations cannot be expected to be paid, except such funds have been paid and are held by co-insurers. Government debts are therefore not expected to feature as part of outstanding premium.

v. Assessment of debtors for impairment is first done on individual before collective basis.

 

 

b. Gaps. The following have been observed from financial submitted for our review i. Information provided to prove the existence of outstanding premium is inadequate.

ii. Assessment of individual and collective impairment on premium debts based on brokers instead of individual policy holders.

iii. Disregarding market agreement which considers any premium debt above ninety (90) days as impaired.

iv. Non-impairment of premium receivables from MDAs remaining unpaid as at end of the year 31/12/2012.

 

 

c. Improvements Expected: i. sufficient information to prove the existence of outstanding premiums in excess of N 400,000, should accompany annual returns.

ii. The individual and collective impairment assessment should be based on the individual policy holders and not on brokers as the credit risk is more on the insured rather than on the broker. Brokers profile can only be used in respect of premium collected by such brokers awaiting remittance.

iii. The collective impairment should be based on groups that have similar credit risk characteristics. Grouping applied must be appropriate.

iv. The impairment test should be based on incurred loss model and the basis applied must be reasonable.

v. Premium debts above 90 days market agreement should be considered impaired

vi. Any premium debts relating to Government accounts for which payments have neither been received after year-end nor proven to be made to co-insurers who are holding same in trust should be considered impaired.

vii. Statement of premium received but not yet remitted to the Underwriter, should be obtained and submitted with the annual returns.

viii. All premium included in the financial statements for the year ending 2012 will be verified by the Commission. Where trade receivables are subsequently found to have been misstated, correction will be effected as prior year adjustment in 2013, disclosure of such deliberate misstatement will be made in the Financial statements and other sanction deemed fit by the Commission will be imposed.

ix. Underwriters are hereby reminded that the requirement of the Commission for periodic reconciliation of accounts with brokers is still operative. Appropriate penalties will be imposed in 2013 on any cases of non-compliance with the guideline.

 

8. VALUATION OF UNQUOTED INVESTMENTS

 

a. Principles: Investments in unquoted equities shall be measured at fair value. Where the fair value cannot be reliably measured, they should be carried at cost less impairment loss.

b. Gaps i. Fair value (valuation) model were not based on reliable and verifiable market information.

ii. Those measured at cost were not objectively tested for impairment.

 

c. Improvements Expected: i. Fair value of unquoted investment should be based on reliable and verifiable market information.

ii. The information used for the fair value should be documented and details provided to the Commission.

iii. When the carrying amount is based on cost, this fact should be disclosed as well as t explanation as to why their fair value cannot be measured reliably.

iv. Unquoted investments valued at cost should be objectively tested for impairment. The impairment model should be properly documented and details provided to the Commission way ahead of the annual return.

 

 

9. DISCLOSURE REQUIREMENTS

a. Principles: Reporting entity achieves a fair presentation by providing among others, relevant IFRS disclosure requirements to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

b. Gaps: Non disclosure of the following: i. Capital management with regard to externally imposed Capital Requirements, the consequences for non-compliance and efforts made to meet the requirements.

ii. Claims development - History of actual claims compared with previous estimates.

iii. Maturity Analysis of financial assets and financial liabilities.

iv. Information that enables users evaluates the nature and extent of risks arising from insurance contracts.

v. IAS 1 disclosure requirements on.

1. Current and non-current portion of assets and liabilities.

2. Distribution of profit or loss and total comprehensive income between owners of the parent and non-controlling interest;

3. Presentation of items in other comprehensive income into those that may be reclassified subsequently to profit or loss from items that may not be reclassified subsequently to profit or loss.

4. Separation in the Statement of Changes in Equities of items of total comprehensive income from the transactions with the owners of the entity.

vi. Fair value hierarchy for fair value measurements recognized in the financial statements for each class of financial asset.

vii. Non disclosure for financial instruments, the basis of classification and valuation technique used and assumptions applied in determining fair values for each class of financial assets or liabilities.

c. Improvements Expected: Relevant disclosure requirements, such as those listed above and others as required by respective IFRS should be appropriately presented.

 

10. MATTERS FOR THE ATTENTION OF PARTIES IN THE FINANCIAL REPORTING SUPPLY CHAIN

 

a. The financial statements submitted to the Commission will be subjected to post approval validation, including evidence of parties in the financial reporting supply chain having performed their expected role according to relevant laws, regulations, guidelines and professional standards. Directors, Auditors, Actuaries and others who certified data, included in the financial statements will be held accountable for their role in financial reporting according to prescription of extant laws.

b. All errors or omissions discovered will be required to be corrected according to the requirements of IFRS. In addition, the Commission will require their special disclosure in the financial statement for the year ending 2013 as evidence of the quality of corporate governance and audit attestation. Where appropriate, affected financial statements will be restated.

c. The attitude of Insurers to the determination of the existence of debtors and unquoted securities as well as their testing for impairment is a cause for concern. Debts and unquoted investments that cannot be proven to exist should be reversed and not considered for impairment. The issue of high level of outstanding premiums and its suggestion of fictitious premiums income is creating a reputational problem for the industry. The transition to no-premium-no cover regime should not be taken as an excuse for financial statements to be loaded with any fictitious premiums as shareholders, investors and users of financial statements are going to depend on them to make decisions.

d. The signatures required on the Financial Statement should include their FRC Registration number.

1. Chairman Board of Directors.

2. CEO.

3. CFO.

4. Chairman Audit Committee.