IFRS Update A discussion on the recent changes to IFRS and the road to convergence with US GAAP

Speakers Colm Homan, Partner, PwC Anna Burns, Senior Manager, Deloitte & Touche James Berry, Director, KPMG Moderator Tom Kelly, Partner, KPMG

Agenda What is IFRS US Regulatory Developments Insurance Contracts Financial Instruments IFRS 1, First-time Adoption of International Financial Reporting Standards IAS 37, Provisions, Contingent Liabilities and Contingent Assets,

What is IFRS International Financial Reporting Standards (IFRS) IFRS is a high-quality, comprehensive, globally-accepted set of accounting standards In many instances, IFRS contains similar concepts to U.S. GAAP IFRS is a less extensive body of literature than U.S. GAAP, with limited industry-specific guidance and less detailed application guidance There are more circumstances where application of IFRS will require exercise of judgment, supported by contemporaneous analysis and documentation IFRS requires transparent disclosures in the financial statements of critical accounting policies and estimates, particularly in areas requiring application of judgment

What is IFRS Joint IASB/FASB efforts Convergence continues, with the following key joint projects: revenue recognition; financial statement presentation; lease accounting; financial instruments; derivatives and hedging; de-recognition; consolidation; and fair value measurement Worldwide Over 100 countries either require or allow IFRS (or a national variant) for listed companies Other countries have plans to adopt or converge to IFRS by 2011: –Brazil, Canada, Chile, India, Mexico, Singapore, South Korea –Japan: optional early adoption for FY 2010 and possible mandatory adoption by 2016

What is IFRS Bermuda IFRS conversion activity is mainly focused in the following areas: –Several large reinsurance companies are assessing the impact of converting from US GAAP to IFRS due to the SEC roadmap/work plan and Solvency II –Public interest entities (includes listed companies and local insurers) who currently prepare financial statements under Canadian GAAP have to prepare IFRS financial statements from 2011

Roadmap Nov 17, 2008 Comment letters Apr 20 “We need a single set of global standards” Regulatory Reform June 17 “We need a single set of global standards” G20 London Summit Apr 2 “ We need a single set of global standards” G-20 Pittsburgh Summit Sep “We call on international accounting bodies to develop a single set of standards by June 2011” Mary Schapiro speech at IOSCO Oct 8 “I am committed to focusing our efforts this fall to following up with a work plan that expands upon the concepts proposed in the roadmap” SEC Draft Strategic Plan Oct 9 We will promote … a single set of high-quality global accounting standards Statement on Global Accounting Standards Feb 24 US Regulatory Developments

SEC work plan pointing towards IFRS adoption by U.S. issuers February 2010: SEC Statement and work plan in support of convergence and global accounting standards –SEC reaffirmed its support for a single set of high-quality, globally accepted accounting standards and for the convergence of U.S. GAAP and IFRS –Statement that IFRS is best-positioned to be able to serve the role as the single set of global standards

US Regulatory Developments Work plan describes 6 specific areas relevant to SEC’s decision on adopting IFRS, including: Areas most relevant for SEC’s decision to adopt IFRS: –sufficient development and application of IFRS and –independence of standard setting for the benefit of investors Transitional considerations: –investor understanding / education regarding IFRS –examination of how the U.S. regulatory environment would be affected –Impact on issuers, such as changes to accounting systems, including evaluation for both large and small issuers and –human capital readiness, such as education and audit capacity

US Regulatory Developments SEC work plan pointing towards IFRS adoption by U.S. issuers (cont’d) Next steps –Beginning no later than October 2010: SEC staff will provide periodic progress reports on work plan –2011: SEC will consider whether, and if so, how to incorporate IFRS into the U.S. financial reporting system –2015 or 2016: Estimated first time U.S. issuers would be required to report under IFRS; SEC will further evaluate timeline as a part of the work plan Possible that early adoption may be allowed for some issuers once decision on IFRS is made

Insurance Contracts

Phase II of the Insurance Standard Background Tentative Decisions and Timetable Potential Impact

Background to Insurance Contracts Project Current situation for accounting for insurance contracts is a mixed model Resulted in too much diversity, less relevance and reliability, and inconsistency The IASB started with a clean slate to develop Phase II Discussion paper published May 2007 Comment period closed Nov 2007 Phase II Exp Draft July 2010 Phase II final standard June 2011 Phase II IFRS effective 2012/13+ Phase II work begun Jul 2004 We are hereFASB joins project

Insurance Contracts Project The FASB joined with the IASB for Phase II of the IFRS 4 – Insurance Contracts project Purpose – comprehensive financial reporting standard for Insurance contracts (life and non-life) It is expected that the outcome of Phase 2 will become US GAAP irrespective of if and when there is overall convergence of US GAAP and IFRS Current Timetable IASB and FASB are committed to July 2010 Exposure Draft, with a comment deadline of 3 months. FASB have not concluded as to whether they issue a DP or ED. Final IFRS standard is due by June 2011 (when key IASB membership turns over)

Phase II of the Insurance Standard Background Tentative Decisions and Timetable Potential Impact

Tentative decisions made Measurement objective and approach IASB marginally support a 4 building block approach - Expected value of cash flows - Discounting for time value of money - Explicit risk adjustment - Residual margin (amount to avoid a day 1 gain) FASB in favor of a composite margin Both methods likely to be included in exposure draft IASB and FASB discussions to date

Tentative decisions made Discounting for time value of money IASB and FASB apply discounting, and the discount rate should not be impacted by changes in own credit standing IASB- not an asset backed discount rate IASB- characteristics of liability Explicit risk adjustment Reflect insurer’s view of uncertainty Updated each reporting period Additional guidance on measurement tbd IASB and FASB discussions to date

Tentative decisions made (con’t) Residual margins At inception, no day 1 gain Subsequent treatment of residual margins being discussed - Amortized in some predetermined manner - Not updated each period for experience, i.e., not a “shock absorber” Unearned/Earned premium expedient for short duration contracts Definition of a short duration contract under debate

IASB and FASB discussions to date Tentative decisions made (con’t) Acquisition costs Include “incremental costs at the contract level” as cash flows in building block model Unbundling (e.g., deposit vs. insurance vs. service) Not required for recognition or measurement if components are significantly interdependent (proposal around notion of significant and interdependent being refined) Performance statement Narrowed view to summarized margin vs. expanded margin Most recent vote in favor of summarized margin with supplemental disclosure about volume of business

IASB and FASB discussions to date Tentative decisions made (con’t) Reinsurance Accounting Generally, follow same approach as insurance accounting Definition of insurance contract Compensation for loss (excluding manufacturer/dealer warranties, fixed service fee contracts) Must include significant underwriting or timing risk with proviso to examine certain timing delays Risk transfer IASB and FASB: focus on existence of possible outcomes in which the PV of cash flows is negative

Phase II of the Insurance Standard Background Tentative Decisions and Timetable Potential impact

Financial reporting Earnings volatility as assumption unlocked Revised income statement presentation Potential for significant additional disclosure Finance transformation Need appropriate resources Manage competing projects such as solvency II Ensure proper training Implement internal controls

Potential impact Systems requirements Actuarial systems may need to provide cash flow projections Enhance systems configurations to meet new demands May require new or updated ERP implementation Business issues Impact on new product design Changes to agent compensation structure to reduce up front commissions Planning, budgeting and forecasting impacted Educate users of financial information

Financial Instruments

IFRS 9: Financial Instruments –What does it mean? Changes to classification and measurement –Effect on impairment IAS 39 replacement timeline Exposure Draft: Amortized cost and Impairment

Financial Instruments IFRS 9 Financial Instruments IFRS 9: Financial Instruments –Effective for periods beginning on or after January 1, 2013 with early adoption permitted. –New classification and measurement model for financial assets. –Financial liabilities currently scoped out.

Financial Instruments Revised classification and measurement

Financial Instruments So what will change?

Financial Instruments Impact on impairments Impact on impairment requirements: InstrumentIAS 39 classificationsImpairment testing required? New classificationsImpairment testing required? Equity investments Available-for-sale Cost less impairment FVTPL Yes No FVTOCI FVTPL No Debt instruments Available-for-sale Loan and receivable Held-to-maturity FVTPL Yes No Amortised cost FVTPL Yes No

Financial Instruments IAS 39 replacement project timeline 2013 Hedge accounting Derecognition Classification and Measurement Impairment Q H H Mandatory adoption effective date Q Exposure draft Request for information IFRS 9 – Financial assets Exposure draft Finalised standard for early adopters ED Financial Liabilities Re-exposure? Final standard Impairment Final standard Hedge Accounting Final standard Derecognition Final standard Financial Liabilities

Financial Instruments ED Amortized cost and Impairment ED Amortized cost and Impairment ED issued 5 November 2009 –Comment deadline: 30 June 2010 Objective: improve information on ‘effective return’ over expected life of a loan Introduces ‘expected loss’ model - removes ‘incurred loss’ model Only applies to amortised cost assets (e.g. loans & other debt instruments)

IFRS 1, First-time Adoption of International Financial Reporting Standards

IFRS 1: First-time adoption IFRS 1 sets out transition guidance for adoption of IFRS Generally IFRS accounting policies at the first reporting date are retrospectively applied –Exemptions and exceptions Opening balance sheet at beginning of comparative period Comparative financial statements and reconciliation to previous GAAP Transition rules apply to annual and interim financial statements

Example timeline: 2011 adopter Jan 1, 2010Dec 31, 2010Dec 31, 2011 Restate previous GAAP to IFRS First IFRS statements Current balance sheet date IFRS opening balance sheet Equity reconciliations Profit reconciliation Opening balance sheet – create at start of earliest period for which entity presents full comparative information under IFRS

Types of exemptions Retrospective application prohibited Hedge accounting Estimates Elective exemptions include Deemed cost Employee benefits Cumulative translation differences Decommissioning liabilities Share-based payments Two types of exemptions from “general rule” of retrospective application Can pick and choose elective exemptions!

IAS 37, Provisions, Contingent Liabilities and Contingent Assets

IAS 37 (Provisions) IAS 37 addresses liabilities of uncertain timing or amount that are not within the scope of another standard. IASB aiming to replace IAS 37 with a new IFRS in 2010 (probably not effective before 2012) –Closer alignment with US GAAP –Closer alignment with other IFRSs –More specific measurement requirements

Current IAS 37 requirements Currently effective requirements Legal or constructive obligation Probable outflow that can be reliably estimated Measurement is at ‘best estimate’ Discounting if effect is material

Proposed IAS 37 replacement IASB proposals High level measurement objective – lower of: –Present value to fulfill obligation –Amount to be paid to cancel obligation –Amount to be paid to transfer obligation to 3 rd party Expected present value measurement Inclusion of a risk adjustment Removal of “probable outflow” criterion Removal of reimbursement asset cap Insurance contracts excluded from scope