International financial reporting standard (IFRS)

1
International financial reporting standard (IFRS)

• What is IFRS?
• How does it effect the medical schemes?
• Issues arising out 2005 and 2006 Annual Financial
  Statement reporting
• Matters for attention in 2007 year.

2
What is IFRS?

• Statements issued by the International Accounting
  Standards Board
• South African Accounting Standards follow the
  IFRS framework
• Certain organisations are obliged to report ito
  IFRS.
• Auditors are required to report if auditees have
  complied with the IFRS statements in their annual
  financial statements

3
What is IFRS?

• IFRS comprises 8 standards at this stage and is
  growing.
• Reports are expected to be presented ito the
  statements from effective dates.
• IFRS4 for example is being introduced in phases.
  First phase applied from 2005.
• There are 16 International Accounting Standards
  which also have to be complied with covering
  different aspects of accounting and business
  transactions.

4
How does this effect medical Schemes?

• Act requires that annual financial statements are
  prepared in terms of generally accepted
  accounting practices.
• These practices include IAS and IFRS statements
  of accounting
• Bill has been drafted to require medical schemes
  to report in terms of International Financial
  Reporting Standards which therefore includes IAS
  and IFRS statements.

5
How does this effect medical Schemes?

• Prior to 2004 annual financial statements were
  prepared in terms of South African Standards of
  GAAP
• 2005 and 2006 were prepared ito IFRS and IAS
  statements
• The bill, if enacted as drafted, will require
  schemes to continue reporting ito IFRS and IAS.

6
Issues arising out of 2005 and 2006 reporting

• Medical schemes are classified as insurance
  businesses and must report ito IFRS4 which
  applies to insurance business.
• Each contract between a member and the scheme is
  classified as an insurance contract.
• Each provider contract (eg capitation) in which
  risk is transferred from the scheme to the
  provider is classified as re-insurance.

7
How does this effect medical Schemes?

• There are 2 types of managed care costs
• Ones in which providers are paid for services
  rendered to beneficiaries
• Ones in which the managed care organisation
  provides a service aimed at managing the
  provision of services such as pre-authorisation
  and case management.
• The first is treated as a claims cost
• The second could be treated as a cost of managing
  claims or as administration costs.

8
How does this effect medical Schemes?

• Capitation fees and arrangements where risk is
  transferred to a provider group does not remove
  the ultimate responsibility for the provision of
  care from the scheme.
• If the provider is unable to provide contracted
  services then the scheme will have to pay another
  provider for providing the same services.

9
How does this effect medical Schemes?

• SAICA and CMS have jointly prepared an accounting
  guide to assist the schemes in preparing their
  AFS.
• In 2005 a sample set of accounts was included in
  the guide
• SAICA may not ito their arrangements with the
  International Accounting Standards Board
  interpret the IFRS statements.
• Guideline for 2006 therefore did not include a
  sample set of accounts.

10
How does this effect medical Schemes?

• Schemes required to interpret the IFRS
  themselves.
• Administrators requested assistance from scheme
  auditors in interpretation
• Different auditors had different approaches
• Resulted in a variety of Income statements, in
  particular, being presented to members.
• CMS rejected AFS of many schemes as their
  interpretation differed from that of the schemes

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Issues arising from2005 AFS reporting

• Accounting policies. Use relevant only.
• Offsetting of fees paid to asset managers against
  investment income not allowed.
• Materiality of expenses - disclosure
• Interest paid on savings to be disclosed
  separately. Not deducted from investment income
• Treatment of realised and unrealised profits and
  losses on investments

12
Issues arising from2005 AFS reporting

• Correlation between the Balance Sheet, Income
  Statement, Cash Flow and the notes at line item
  level
• Wash sale transactions
• Risk management report
• Related party transactions with particular
  emphasis on trustees

13
Issues arising 2006 AFS reporting

• Alternate adopted by some schemes as rejected by
  the CMS (alternate 1)
• Risk measurement in the income statement.
• Gross contributions
• Savings contributions
• Net contributions received
• Expense incurred in transferring risk to a
  providers. Capitation agreements.
• Contribution for risk carried by the scheme

14
Issues arising 2006 AFS reporting

• Claims expenses (alternate1 )
• Gross claims incurred
• Less paid by savings account members
• Net claims
• IBNR adjustment ( prior year and current year)
• Plus recovery under risk transfer arrangements
• Claims incurred by the scheme for own risk
• Less recovery under risk transfer arrangements
• Managed care management services (costs incurred
  in managing claims)
• Claims expense

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Issues arising 2006 AFS reporting

• Alternate 2 adopted by some schemes accepted by
  the CMS
• Gross contributions
• Less savings portion
• Net contributions
• Claims Expense
• Gross claims incurred
• Less paid by savings account members
• Net claims
• IBNR adjustment ( prior year and current year)
• Plus recovery under risk transfer arrangements
• Claims incurred by the scheme

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Issues arising 2006 AFS reporting

• Risk Transfer Arrangements
• Payments made to providers under risk transfer
  arrangements
• Less Recovery under risk transfer arrangements
• Net effect of Risk Transfer Arrangements
• Administration
• Managed care costs management services

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Issues arising 2006 AFS reporting

• Trustees as Related parties.
• Trustees are related parties
• Trustee report required to reflect by trustee
  -remuneration paid to the trustee and expenses
  incurred on his/her behalf in fulfilling duties
  as trustees
• AFS reflect the same in total and not by trustee
• AFS also to include aggregate membership
  contributions received from trustee for himself
  and dependents plus any family member who is a
  member of the scheme in their own right
• as well as aggregate benefit payments made by the
  scheme on trustee families behalf.

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Matters for attention in 2007 year

• SAICA and CMS to prepare a guideline for 2007
  year.
• Need to prepare guideline which reflects
  alternate approaches to the interpretation of
  IFRS which are acceptable to Schemes, Scheme
  Auditors and CMS.
• Guideline to take into account the new IFRS7
• Increased disclosure around financial instrument
  IAS32 and insurance risk IFRS4.
• Financial managers and auditors to meet and
  discuss the implications so as to reduce pressure
  at year end.

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IFRS

• QUESTIONS