News that will impact your business

IFRS 17: accounting consolidation for the insurance industry

Standard on accounting for contracts for greater comparability; insurers must be attentive to risk and governance aspects

The International Accounting Standards Board (IASB) published the International Financial Reporting Standard (IFRS) 17 – Insurance Contracts, which proposes to account for  insurance contracts in a consistent manner, contributing to a greater understanding, on the part of investors and stakeholders, of aspects such as analysis of risk exposure, profitability and financial position.

The new guidance replaces IFRS 4, which allowed to account for insurance contracts based on national accounting standards. The different approaches impaired the comparability and analysis of the financial performance of other companies and other information published.

The impacts caused by the IFRS 17 implementation in insurers are not limited only to accounting implementation challenges, but also require a preparation for the transformation in the corporate governance environment of companies in the sector.

One of the proposed changes is that liabilities of insurers be measured at fair value – the amount by which an asset can be traded – or a liability settled – in accordance with the market reality – and provide a more uniform and transparent view of measurement and presentation for all insurance contracts issued.

Another significant change will be on the contracts’ aggregation level. The adoption of the IFRS 17 will require that the identification of contract portfolios include elements that are subject to similar risks to those jointly managed.

The level of complexity is also revealed in the need to significantly change the way insurance companies collect, store, analyze and disclose data, since IFRS 17 directs the analysis focus from prospective to retroactive. For this reason, a greater coordination between the areas of finance, actuarial, technical, risk management, technology, products, and other support areas, such as strategic planning and internal audit, is needed.

IFRS 17 will become effective beginning on or after January 1, 2021 and will permit early adoption for cases where IFRS 15 – Revenue from Contracts with Customers and IFRS 9 – Financial Instruments have already been applied.

The insurers need to be alert and a step forward in the management of risks and governance aspects that the IFRS 17 changes can bring to their business environment and their internal control structure., Gilberto Souza, Deloitte's Capital Market partner for the Financial Industry.

Portfolio realignment as a means for growth

Ongoing review of the products and services portfolio allows to concentrate focus on the core business and contributes to the company's better positioning in the market

In times of economic downturn and difficulties in relation to obtaining credit and financial resources in appropriate conditions, companies are reviewing their products and services portfolio in order to identify divestment opportunities that enable generating cash to reduce debt and to make investments in the core businesses.

Rethinking processes, strategic planning and focus of action in the current environment provide companies with a broader view of their investment needs, as well as support decision making involving disposal of businesses that are not generating cash or value to the shareholder and development of action plans focused on their core business.

Facing a turbulent economic environment, it is extremely important to realign the business portfolio, seeking to balance the company’s financial position, either by reconfiguring or reducing liabilities or increasing liquidity, fueled by the sale of businesses that demand too much cash, which are generating low returns or losses or that are not aligned with the company’s future growth strategy.

The first points to be observed by organizations during the realignment process are their long-term strategic objectives, the market share they want to have, profitability and return on invested capital levels and the need for investments to achieve these goals. This analysis is as an important foundation for the improvement of competitiveness and the business positioning in the market.

Reviewing the portfolio is a good opportunity to identify and sell assets that are not generating the expected result and to focus on the core business. A well-structured divestment plan generates funds to capitalize the company, reduce debt and enable investments to position them at the top of their segment., Reinaldo Grasson, Deloitte's Financial Advisory.

Outsourcing best suited to global reality

Outsourcing Law, which regulates the hiring of third parties, helps to make Brazilian companies more competitive

Sanctioned in March 2017, Law No. 13,429, known as the “new” Outsourcing Law, allows, among other innovations, hiring a third party to engage in any kind of activity in a company, including its primary business, known as its core activity.

Before the new proposal, outsourcing in Brazil was allowed only in activities considered “non-core”, which did not directly affect the company’s essential function. The lack of clarity about the concept of core and non-core activities ended up generating uncertainty and was the main source of outsourcing’s legal risks in Brazil.

The study “Outsourcing Compared: Brazil and Other Countries”, prepared by Deloitte in partnership with the National Confederation of Industry (CNI), has researched the legal treatment given to the subject in 17 countries and concluded that, in none of them, there is restriction on which production process’ steps can be assigned to other companies.

The outsourcing practice allows the formation of a strategic link in the companies’ production process, aggregating expertise, technology and efficiency to the production chain, in addition to being an important instrument for Brazil to be aligned to other countries with which it often competes.

With the new legislation, the time now is for reflection and organization so that companies that operate in the country can develop a broad vision of the labor and social security aspects, in order to ensure a healthy relationship between the contractor and the hiring party, in addition to contributing to effective improvements in the business environment.

Companies that operate in Brazil compete with outsourcing hubs around the world. Thus, the practice should be viewed as a strategic tool to bring productivity and quality to the workforce, guaranteeing the rights of these professionals., Fernando Azar, Deloitte's Tax Partner.

Advance preparation for Pro-Ethics Company Program

To obtain the certification granted by the CGU, companies should focus on governance, risk management and compliance structure

In the midst of a business environment that increasingly demands ethical and transparent positioning from the organizations, the importance of programs like the certification Pro-Ethics Company – created in 2010 by the Ministry of Transparency and the Office of the Comptroller General (CGU), in partnership with Instituto Ethos – is part of the movement of companies in compulsory or voluntarily adopting practices aimed at corporate governance, compliance and regulatory policies.

The 2016 edition of Pro-Ethics was attended by 195 companies, but only 25 of them have received certification. The initiative is to promote the integrity and compliance in the Brazilian corporate environment, by means of certifications provided by the CGU to companies committed to good measures of preventing and combating fraud and corruption.

At the time, the organizations’ great challenge is to adapt their processes and structures to the principles of compliance demanded by the program to grant the recognition. The compliance with the Pro-Ethics precepts can be complex and may require specialist support for companies to be able to participate.

In 2017, registration took place between February and May; 288 companies participated, a number 48% higher than the previous year. For 2018, the expectation is that the application deadlines will occur in the same period of last year.

Companies need to organize in advance and invest in a business strategy aligned with the most advanced governance and regulatory compliance practices to be ready to meet the requirements and demands set by the CGU., Camila Araújo, Deloitte's Risk Advisory partnera.