These differ in the treatment of specific operating expenses relating to the exploration of new oil and natural gas reserves. The accounting method that a company chooses affects how its net income and cash flow numbers are reported. Therefore, when analyzing companies involved in the exploration and development of oil and natural gas, the accounting method used by such companies is an important consideration. Two Approaches The successful efforts SE method allows a company to capitalize only those expenses associated with successfully locating new oil and natural gas reserves.
The objective of IFRS 17 is to improve financial reporting by providing more transparent, comparable information about: The effect of the insurance contracts on financial performance. The way by which entities earn profits or incur losses, through underwriting services and investing premiums from customers.
The nature and extent of risks that companies are exposed to as a result of issuing insurance contracts. IFRS 17 starting in will introduce additional requirements regarding calculation and disclosure of various financial measures. The aims of IFRS and Solvency II are to facilitate comparability and transparency from a regulatory and accounting perspective to external stakeholders, in contrast to the divergent practices and measures which currently characterize insurance reporting.
Clear and transparent communications will help stakeholders navigate their way through the changes to regulatory and statutory reporting, increase confidence, and help mitigate any adverse impacts on share prices and ratings. Solvency II will lead to competitiveness of the products in terms of their pricing and features offered by insurers with a focus on an enhanced level of policyholder protection and solvency capital requirements.
IFRS 17, on the other hand, aims to apply uniform accounting standards for all types of insurance and reinsurance contracts and also to reduce the gap between standards followed in insurance. IFRS 17reporting will also be more transparent due to stringent disclosure requirements.
Solvency II specifies the risk-free rate as well as liquidity premium, but under IFRS 17, there is no such restriction on liquidity premium. Although the principles-based approach will be adopted in both regulations, Solvency II measures are more prescriptive and comprehensive as compared to IFRS Profits are recognized immediately at the inception under Solvency II, while under IFRS 17 profits will be recognized over the life of the individual insurance contract.
Similarities There are similarities between the two frameworks that insurers will need to carefully consider when developing an approach for implementation of both the directives: In both directives, there is a departure from the narrow and prescriptive rules and adoption of a broader and more risk- and principles-based approach to regulation.
Asset and liabilities are likely to use a current valuation approach, which is expected to increase volatility on financial statements in comparison to current standards.
A best-estimate basis is used in expected future cash flows. Discount rate used is the sum of risk-free rate and liquidity premium.
The synergy of a coordinated approach For insurers it makes sense to take a coordinated approach for the implementation of both directives given the significant overlaps in the requirements. There is no requirement for consistency between regulatory and financial reporting, but there are significant overlaps in both the measurement and disclosure requirements between frameworks.
Performance management changes Given the similarities in the regulations, insurers will need to improve their understanding of the differences between Solvency II and IFRS in order to effectively manage their business.
For example, the primary focus for Solvency II is capital adequacy rather than profitability management. Your finance unit can help you negotiate this challenge by explaining the differences between the summarized margin approach from IFRS 17 and the profit-and-loss attribution under Solvency II.
Business planning and forecasting models will need to align with the new external reporting requirements and models for evaluating potential investments and acquisitions. Informing and educating external stakeholders, including analysts, will be a major challenge during the transition period.
Clear and transparent communications will help stakeholders navigate their way through the changes to regulatory and statutory reporting, improve confidence, and help mitigate any adverse impacts on share prices and ratings. Minimizing the impact on systems and data Both frameworks require insurers to invest in data quality, control and management.
The content and structure of data captured from business units to support group statutory and regulatory reporting will change significantly. This will require major changes to group financial consolidation and reporting systems.
In addition, changes to the primary financial statements and disclosures will affect the general ledger and chart of accounts at the group and business unit levels. Solvency II also requires insurers to invest in data quality, control and management; however, there are differences in the detail e.
A key challenge will be to ensure that these different types of data are available and that systems have the flexibility to accommodate differences in the inputs to cash flows between the two frameworks.
Process and governance considerations Under IFRS 17, accounting policies will need to be standardized and you will need to ensure that the compliance processes are auditable.
IFRS 17 has raised the benchmarks in terms of governance and quality of documentation required to facilitate a smooth audit sign off.Pertra ASA 3 Section 1: Impact on Pertra ASA’s accounting principles from transition to IFRS This section of the report must be read in conjunction with Pertra ASA‟s IFRS compliant accounting policies presented in section 3 of the report.
1 November Applying IFRS in the Oil & Gas sector Overview In May , the IASB 1 issued a new standard, IFRS 11 Joint Arrangements, which became effective from 1 . are based on an independent reserves evaluation of oil and gas assets of Ikkuma effective December 31, (the Sproule Report), prepared by Sproule and Associates, and certain oil and gas assets in the Foothills area of Alberta (the “.
Application of IFRS: Oil and Gas. published in October , and. The Application of IFRS: Mining. 6 New on the Horizon: Extractive activities. April 2.
Deinitions of reserves and resources New on the Horizon: Extractive activities. April “The impact of IFRS is felt all along the oil and gas value chain, but many of the key dilemmas and judgments are greatest at the exploration and production stage,” PWC said.
Prepare Financial Statements in accordance with International Financial Reporting Standards (IFRS) Evaluate the Financial and Operational Performance of international Oil & Gas companies Evaluate the importance and contribution of Oil & Gas to the National Governments and the Fiscal Budget.