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. TheBHFSouthern African Conference22-25 July’07 Sun City

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 TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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. TheBHFSouthern African Conference22-25 July’07 Sun City

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 TheBHFSouthern African Conference22-25 July’07 Sun City

11. 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 TheBHFSouthern African Conference22-25 July’07 Sun City

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 TheBHFSouthern African Conference22-25 July’07 Sun City

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 TheBHFSouthern African Conference22-25 July’07 Sun City

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 TheBHFSouthern African Conference22-25 July’07 Sun City

15. 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 TheBHFSouthern African Conference22-25 July’07 Sun City

16. 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 TheBHFSouthern African Conference22-25 July’07 Sun City

17. 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. TheBHFSouthern African Conference22-25 July’07 Sun City

18. 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. TheBHFSouthern African Conference22-25 July’07 Sun City

19. IFRS QUESTIONS TheBHFSouthern African Conference22-25 July’07 Sun City