Though it’s exciting to think about the additional efficiencies your business will gain in absorbing or being absorbed by another company – such as increased capital, wider market reach, economies of scale in production and manufacturing, increased technological capacity, and more – it is important to get to know the company you are merging with first. You want to make sure that it’s a safe and sound transaction, and mutually advantageous to both parties. You wouldn’t want to get married to a person with skeletons in the closet, after all.
The following two tenets are probably the most important things to consider when talks of a merger are in the works.
1. Ask yourself the question: are your businesses a good fit? Why?
How would partnering with each other improve your brand equity, as well as your bottom line? Here, you get to kill two birds with one stone. The first job is to assess how reputable the partner company is deemed by the general public. Would partnering with them align with your company’s values and ethos? Will you still be regarded by the market as the honourable enterprise you have always been seen as, or maybe even improve how you are perceived? Do the brands banding together create the image you have always wanted to be seen by your customers?
Also, will the combination of your businesses increase efficiency overall? Will it contribute to an improvement of your business? Will it be a boost to the company’s overall profitability? Answering these questions in a positive way are the basic and most important concerns you need to cover from the beginning.
2. Take into account all the objective financial considerations.
Of course, there are a lot of figures that need to be studied when getting into a merger. Basically, you have to make sure that a company’s assets, liabilities, and equity are all that they declare them to be. Make sure that assets standings are accurate, are not over declared, major capital investments such as equipment or real estate values are declared as well as corresponding depreciation and amortization for these, not to mention other deeds, title policies, and permits.
[ymal]
Liabilities are also very important to consider. Make sure you have a detailed schedule of all short and long term debt, a full list of creditors and suppliers, corresponding terms and interest rates, and most importantly, the company’s current standing in terms of ability to pay these creditors.
These details can be pretty tedious; so it is wise to hire the appropriate accountants, lawyers, and due diligence companies such as Diligence International Group. It may be an expense for you up front, but it should be seen as an investment – it is better to have all important details ironed out in the beginning before getting into any binding contracts.
These two are probably the two basic pillars in assessing and properly evaluating your merger. The rest may fall under these two categories, such as company culture and corresponding effects on your human resource team, their corporate social responsibility and environmental sustainability practices, patents and other intellectual property concerns, among others.
With the upcoming introduction of IFRS 17, the new insurance contracts standard, the Financial Stability Board (FSB) is calling for implementation as soon as possible. Under IFRS 17, insurance obligations will be accounted for using current values, instead of historical cost. Martin Sarjeant, Global Risk Solutions Expert, FIS, below provides Finance Monthly with a thorough account of why firms should welcome the change.
With concerns over costs and a perceived lack of benefits among some insurers, there’s a prevailing mood of doom and gloom about IFRS 17. But rather than striking a deathly blow to the balance sheet, I believe that the new accounting standard for insurance contracts spells good news for insurers and stakeholders.
From this radical “glass half full” viewpoint, I’ve identified seven big benefits that IFRS 17 will bring to the insurance industry:
- Liabilities valued at market value
By bringing the valuation of insurance contracts in line with both the assets that back them and valuations made in other industries, IFRS 17 will initiate better product design and greater transparency. As IASB chairman Hans Hoogervorst explains: “Proper accounting shines light on risks that might otherwise go unnoticed – both by companies themselves and by investors.” So, although the standard may appear initially to weaken some insurers’ balance sheets, it will actually encourage better pricing of insurance contracts and strengthen the balance sheet over time.
- Truer reflection of profits
In some jurisdictions, insurers have designed products to maximize early profits. For example, if an insurer sells a 10-year insurance contract, with premiums paid for one year, it generates massive profits in the first year and then small losses afterwards. IFRS 17, by contrast, measures profit in line with the services performed and spreads it over the contract’s life in a series of smaller cash flows – giving more insight into how profit emerges. The standard also excludes deposit coverage from revenue calculations, which will especially affect the accounting of thinly veiled savings contracts – and, again, help better reflect reality.
- Nearly global consistency
A consistent and high-quality accounting standard for all insurance contracts across most jurisdictions has to be a good thing, right? Particularly for multinational insurers, it will reduce the long-term costs of compliance and make it easier to compare business units and aggregate results and financial statements. What’s not to like?
- Collaboration between actuaries and accountants
Both actuaries and accountants look after the interests of stakeholders and help manage insurers’ finances and risks. But in many organizations, these are still siloed functions with little interaction or understanding of each other’s activities. IFRS 17 will drive them to work together and establish mutual respect and cooperation, which would mean good news for stakeholders and improve the way the company is managed in the future.
- Better governance of actuarial systems
For more than a decade, many insurers have been raising their governance game and reaping tremendous benefits such as lower operational risks and reduced ongoing costs. Others, however, continue to use actuarial systems without the control and automation that IFRS 17 demands. Improving governance standards will not only help achieve compliance but also reduce costs, minimize manual errors and make it easier to access risk insight, all leading to better management of the business.
- Greater protection for policyholders
IFRS 17 will help strengthen insurance company balance sheets (see benefit 1) and offer more protection to policyholders as a result.
- Investor confidence
All the above improvements to the accounting standard give investors proper insight into insurance companies, allowing them to compare one firm with another more consistently. This can only improve investors’ confidence in and understanding of insurers – surely another reason to be cheerful.
However you look at IFRS 17, nothing will stop it from coming into force in more than 100 countries in 2021. So, why not ditch the despair, seize the opportunity for change, embrace the benefits – and see the many positive sides of compliance?
