I had recently been invited to an awareness program on IFRS adoption in financial institutions in Brunei. It was organised by Deloitte and attended by bankers, insurance, takaful, accounting firms, consultants, etc. It was an informative session for most of the audience nevertheless several parts of the region had taken necessary steps to prepare themselves towards the compliance. I had taken the opportunity to add several points to draw attention of takaful players and relevant parties on the same subject matter as follows:
1. There are some school of thoughts which had different opinion on IFRS as the IFRS is specifically mention for insurance and not takaful. The question is whether "takaful equals insurance?". The key element in the definition of insurance in IFRS is that there is a transfer of risk from policyholder to insurance company. However, there is no transfer of risk from policyholder or participant in takaful to the takaful operator as the risk is shared among the participants and takaful operator merely act as a caretaker or trustee to the takaful funds. Furthermore, the risk pool fund is not a legal entity thus whether IFRS is applicable in the case of Takaful. Well, whatever it is, local regulator has the final say in this matter.
2. If the regulator say yes it is applicable perhaps for harmonization with the conventional insurance, the next issue is whether it is applicable to the shareholder fund only, risk fund only, combined funds or consolidated? This need to be taken into consideration during the process of adoption.
3. Qard - takaful operator must by now prepare a management policy pertaining the Qardul Hassan policy and approve by BOD. It must cover the recoverable policy of the Qard, when and how to recover the Qard. A policy must be drawn on the time limit to write-off the Qard, if applicable, in the event that recoverable is no longer possible.
4. Surplus distribution policy - there must be a written management policy pertaining the surplus distribution whether at pool level, policy level as well as at participant level. This policy must be approved by BOD as well as appointed actuary.
5. Next issue is on Actuarial opinion. Auditor sometimes refer to their own actuary whilst the operator usually has their own. Furthermore, regulator may also refer to their own actuary whether internal or external. Thus conflict of opinion may arise between these actuaries pertaining the assumptions used to derive the fair value or best estimates.
6. Takaful Model - all takaful operators will adopt certain type of takaful models whether mudharabah, wakalah or hybrid. However, some companies still vary the model at policy level i.e. different type of takaful policy or plan may adopt different component of takaful model instead of the corporate model. This will complicate the estimate process later on during IFRS preparation. Thus, consistency and standardization must be adopted.
In general, I personally feel that there might be 2 options in this IFRS preparation namely, (1) Prepare two sets of accounts i.e. IFRS and non-IFRS in order to compare with existing business results; and (2) Prepare IFRS for 2014 and 2013 (retrospective) in order to compare the trend between 2 different financial years. Definitely, the cost will be much higher than anticipated due to 2 sets of accounts needed for the first adoption year for IFRS.
