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.
