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The Future State of Accounting Controllership: Trends May 2018

This article discusses the changing role of the controller in finance, including the shifting strategic focus of the CFO, talent and organization considerations, policy and process improvements, and leveraging technology for efficiency. It also highlights the expanding role of controllership in shaping business strategy in a complex regulatory environment.

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The Future State of Accounting Controllership: Trends May 2018

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  1. The Future State of AccountingControllership trends May 2018

  2. Agenda • Introduction to the Digital Controllership • Technical accounting update • Digital Controllership Deep Dive • Q&A

  3. Changing role of controller

  4. Drivers of the changing role of the controller Finance is increasingly expected to partner in a deeper way with the business. Shifting strategic focus of the CFO • Talent and organization • How should the function be organized? • Should we centralize operations, leverage shared service centers or outsource finance and accounting tasks? • What’s the complement of staff that will be needed? • What specific skills will be required to deliver this new vision? • How can value be provided while controlling cost? • Policy and process • How can we deliver on stakeholders’ foundational demands for accurate and timely financial information while simultaneously refocusing the function to aid in the growth equation? • Information and systems • How can the function use technology to free up resources who would be otherwise burdened by mundane tasks? Increasing complexity of business and regulatory environment Evolving business and service delivery models Demand for analytics and data-driven insights Advances in enabling technology

  5. Redefining the vision for the controllership Increasingly complex business and regulatory environment calls for an expansion of capabilities to build a more proficient, effective, and insightful controllership function. VISION Establish a clear direction for the controllership function focused on a shared understanding of future aspirations. Capabilities and skills SKILLS Build the capabilities of your team and grow the competencies you need to be successful INFLUENCE Build the right relationships that allow you to gain support around the function’s vision and key priorities TIME Manage increased demand while balancing the allocation of your time to enable the realization of your vision

  6. Expanding role of controllership CFOs are expecting corporate controllers to contribute to shaping and executing business strategy while continuing to deliver on traditional mandates in an increasingly complex business and regulatory environment. Expanding role of controllership Deloitte Four Faces Framework Leading Edge Traditional role of Controllership Business perspectives Strategist Catalyst Data-driven insights Do “more with less” Threshold Performance Performance Execution Finance Function Strong internal controls Traditional Role of Controllership Control Efficiency Provider of historical information Clean audit Steward Operator Efficient accounting operations Accounting and regulatory compliance

  7. Expanding role of controllership Deloitte Four Faces Framework Leading Edge Catalyst Strategist 14% 21% 17% 30% Threshold Performance 33% 23% Current vs. Desiredtime allocated Current vs. Desiredtime allocated Performance Execution Performance Execution Current vs. Desiredtime allocated Finance Function Finance Function 33% 26% Control Control Efficiency Efficiency Current vs. Desiredtime allocated Operator Steward

  8. Technical Update

  9. Technical Accounting Topics Today, we are going to focus on two areas that will impact the controllership function. IASB Regulation IFRS 17 • FASB Regulation • Targeted Improvements to Long Duration Contracts (LDTI)

  10. IFRS for insurance Technical requirements – IFRS 17, Insurance Contracts The aim of IFRS 17 is to standardize insurance accounting where IFRS is adopted to ensure that users are able to compare companies (even between insurers and other companies), their past performance and their current financial position. The key objectives of IFRS 17: Introduce for the first time a single IFRS accounting model for all types of insurance contracts Make the new accounting model highly transparent Align as much as possible insurance accounting with the general IFRS accounting of other industries Other important principles include: IFRS Insurance Contract Liability Measured at inception as the expected contract profit to be earned as services are fulfilled. It is adjusted for changes in non-financial variablesaffecting future coverage cash flows. Block 4: Contractual Service Margin (“the CSM”) Fulfilment cash flows An entity-specific assessment of the uncertainty about the amount and timing of future cash flows. Block 3: Risk Adjustment An adjustment that converts future cash flows into current amounts. Block 2: Time Value of Money Block 1: Unbiased Expected Future Cash Flows Expected (probability-weighted) cash flows from premiums, claims, benefits, expenses and acquisition costs. The CSM acts a shock absorber for changes in estimate New method of define “insurance revenue” Discount rates based on current market rates for the contract Expected profit from par contracts valued based on assets Current estimate assumptions

  11. LDTI: ASU 2018-12 Changes related to measuring liability for future policy benefits Published in May 2018, the Standard introduces a number of changes related to the measurement of the liability for future policy benefits for traditional and limited-payment long-duration contracts. The changes will affect the following: Accounting implications Cash flow assumptions Frequency of updating assumptions Discount rate measurement • The discount rate used for measurement • The frequency of updating the cash flow and discount rate assumptions differ Impacts of cash flow updates in earnings and discount rate updates impact OCI The cash flow assumptions that insurers use to initially measure the liability Guaranteed contract benefits Guaranteed contract benefitsz Discount rate Termination/lapses Mortality/Morbidity Expenses

  12. Transition IFRS 17 and LDTI- Effective date An Exposure Draft including 13 amendments to IFRS 17 is expected end of June with a 90-day comment period. One of the amendments is the deferral of the effective date to 1 January 2022 With a Long Duration transition date of 1/1/2019, public entities have less than 5 months from issuance to verify they are collecting sufficient data for transition. LDTI Effective Date IFRS 17 Effective Date Transition Date Issuance Date January 1, 2021 August 15, 2018 January 1, 2019 January 1, 2022 For public entities the ASU is effective for fiscal years beginning after December 15, 2020, including interim periods therein. Other entities must adopt in fiscal years beginning after December 31, 2021. Effectively, March 31, 2021 for public entities and December 31, 2022 for all others entities.

  13. IFRS and LDTI impacts to insurers Impacts on business processes, systems, and accounting policy across the organization DATA GRANULARITY DISCLOSURE GENERATION AUDITABILITY& TRANSPARENCY SEQUENCING SELECTINGMODEL APPROACH FORECASTING ACTUARIAL& FINANCE LINKAGES CHART OF ACCOUNTS TRANSITION DECSIONS PORTFOLIO& COHORT GROUPINGS DATASTORAGE CSMMOVEMENT ANALSYSIS While the new accounting requirements poseseveral challenges, it also represents a once in a generation opportunity to realize a common information landscape –to upgrade and optimize key systems and processes,and closely align the actuarial, finance,and business controlfunctions.

  14. Accounting Regulation and the data challenge Data management is critical to the implementation exercise • Insurers will need to deal with increased datavolumesand data qualityrequirements dueto: • Increase in granular valuationrequirements • Restatement of prior yearnumbers • Greater granularity of disclosure and reportingcapabilities • Increase in the use of marketdata • Segmentation of portfolios in annual profitabilitygroups • Insurers will have to modernize fragmented and complex legacy Finance and IT infrastructure. They should answer these keyquestions: • What business needs does an insurer have to address asa • result ofIFRS17 and/or LDTI? • How can an insurer leverage its current IT infrastructureto address business and complianceneeds? • What data management solutions can an insurer buildor buy to address both business and complianceneeds?

  15. We are seeing many insurers gravitate towards a “smart compliance” approach to implementation LDTI does not have a “one size fits all” solution. There is some flexibility in the level of rigor for implementing LDTI. A 'smart compliance' approach is an option which may provide an opportunity to better achieve business goals and objectives while complying with the new standard and flexing efforts toward the most valuable aspects of compliance. Based on an insurer’s technology and architecture maturity, LDTI requires a decision on (1) evolving current state capabilities or components, (2) simplifying current state capabilities or components, or (3) establishing new capabilities or components to enhance current state for new LDTI requirements. Full Modernization Leverage previous finance transformation projects to modernize current IT architecture to achieve a fully modernized process Run rate costs and time decrease as modernization increases Significant changes required to the architecture create both a challenge and an opportunity for an insurer to modernize while also meeting compliance needs The biggest risk revolves around transforming an architecture that is often extremely siloed Insurers should evaluate their current framework for capability gaps in meeting requirements and balance the cost and timeline impacts of their options Smart Compliance Leverage previous finance transformation projects to modernize current IT architecture and gain scales of systems and solutions C High Minimum Compliance Adapt current systems to LDTI without consideration for modernization of IT architecture Cost to Implement B A Low Level of Modernization Low High Level of Modernization Costs Run Rate Cost

  16. Digital Controllership™

  17. What is Digital Controllership? Digital Controllership is a framework used to solve historically unresolved issues and challenges within the controllership function by leveraging new technologies to produce higher data quality and process, allowing clients to reduce costs, work with more confidence and refocus their resources on high-value strategic priorities

  18. We are on the cusp of “Business 4.0” Digitization of white collar jobs via robotic and cognitive automation, and advances in data science have sparked the “Business 4.0” revolution Within 10 Years 1-3 4.0 Dependence on Global Horizontal Category MLPs – (Possibly Regulated) 2019 • 3rd Industrial Revolution • 1969: First programmable logic control system • Through application of electronics and IT to further automate production • 2nd Industrial Revolution • 1870: First assembly line • Through introduction of mass production with the help of electrical energy • 1stIndustrial Revolution • 1784: First mechanical weaving loom • Introduction of mechanical production facilities with the help of water and steam power Widespread Cognitive Augmentation and Automation Early Stage Cognitive Capable RPA1 Solutions Deployed Early Stage RPA BPM Systems • 4thBusiness 4.0 • This revolution redefines what it means to be a professional • RPA will have commenced deployment in most large businesses by 2019 • RPA and Cognitive Automation will be ubiquitous in business by 2022 • Horizontal Machine Learning Platforms (MLPs) become ubiquitous by 2029 1700s 1Robotic Process Automation Source: Industry 4.0: Challenges and Solutions for the Digital Transformation of Exponential Technologies, Deloitte AG, 2015 and Deloitte proprietary research Industrial Revolution Early Stage Technology Mature Technology Future Event Legend

  19. Evolution of automation The automation continuum ranges from enabling strategies that improve parts of business processes to sophisticated technologies with cognitive elements General Purpose Machine Learning Quantum Computing Maturing Emerging Citizen Data Science Affective Computing Autonomous Operations Deep Learning Natural Language Processing Smart Advisors Seamless Communication Virtual Customer Assistants Cloud Computing Complexity Mechanized Automation Offshoring Outsourcing Six Sigma Kaizen Time Robotic Process Automation Cognitive Automation Artificial Intelligence • Screen scraping data collection • Rules based business process management • Tactical toolset to automate repetitive tasks • Cheaper and faster step towards process efficiency • Data input and output in any format • Pattern recognition within unstructured data • Replication of judgment based tasks • Basic learning capabilities for continuous improvement to quality and speed • Natural language recognition and processing • Dealing with unstructured super data sets • Hypothesis based predictive analysis • Self-learning rules continuously rewritten to improve performance As the appetite for automation grows, the interplay of emerging technologies will lead to fundamental changes in how businesses operate and deliver services to customers Source: Gartner Hype Cycle for Emerging Technologies Note: Trends across time are not to scale

  20. Digital Controllership Digital Controllership is the next generation finance ecosystem that utilizes disruptive technology, innovation, data, and people to elevate and differentiate the capabilities of the finance function DYNAMIC DRIVERBASED FORECASTING Cognitive computing and in-memory enables advanced planning & forecasting models to mine databases and perform real-time scenario analyses, uncovering predictive trends and generating key data insights AUTOMATED CONTROLS & EXCEPTION BASED REPORTING RPA enables automation of controls while cognitive ………computing tools produce exception based reporting from Blockchain-enabled communities to reduce risk AUTOMATED TRANSACTION PROCESSING Robotic Process Automation enables leaner operations, reducing costs and redirecting resources toward embedded analytics that spot trends, anticipate risks and predict opportunities in high-value areas END TO END PROCESS PERFORMANCE Cloud platforms are leveraged ubiquitously across the enterprise to enhance consistency in processes and flexibility to scale • FINANCE COLLABORATION • Digital collaboration tools available on the cloud enable and support dialogue across central and local Finance teams, the business and other functions, enhancing connectivity EXPERT TEAMS Finance practitioners demonstrate enhanced capabilities in the Digital space, leveraging specialized financial expertise and data-driven insights to become key business partners

  21. Controllership domain is being transformed due to the advent of digital technologies enabling automation Automation provides nimble solutions which enhance the accuracy of close activities, financial reporting and transaction processing. Automated technologies are challenging the traditional workforce and offer less costly alternatives to large scale architecture transformations. Technology is starting to erode the benefits of traditional cost reduction levers (i.e. labor cost arbitrage through offshoring). The “Digital-shore” is how Controllers are starting to deliver long-term sustainable efficiencies; moving highly repetitive processes back onshore and leveraging automation tools. Exploring the potential application of automation technologies is increasingly a top priority for Controllership leaders Automation can be an enabler of transformation, but the benefits of automation can be limited by upstream system fragmentation and data quality. 1Robotic Process Automation Source: Industry 4.0: Challenges and Solutions for the Digital Transformation of Exponential Technologies, Deloitte AG, 2015 and Deloitte proprietary research

  22. What digital technologies are affecting the Controllership? The current disruption in finance technologies require the controllership to build tech-savvy-capabilities in order to improve the proficiency, effectiveness, and insightfulness of the finance organization.

  23. How do digital technologies improve the Controllership function? World-class controllership functions strategically leverage technology to improve the operational performance, insightfulness, and risk intelligence across the enterprise. Digital core Process automation Analytics & insights “Take the robot out of the human” by leveraging new and disruptive technologies to increase automation and reduce risk Unlock controllership value by leveraging & optimizing the use of core ERP technologies Improve organizational intelligence by uncovering and harnessing insights hidden in financial data • Data architecture • Processing engine • Aggregation & Reporting • Enhanced finance automation • Robotic process automation • Cognitive automation • Insight-driven analysis • Data visualization • Business performance improvement

  24. Automation opportunity for the Controllership function Automation presents the Controllership function with a toolset which can be leveraged across targeted areas to gain efficiencies. It is critical to gain a deep understanding of each of the Finance, Accounting and Transaction Processing opportunities to define where a Pilot program should begin

  25. Adoption of automation solutions offers wide benefits Automation can support various initiatives, including finance agility, efficiency and effectiveness, and cost reduction Greater flexibility in automation • Increased business control as manual processes are automated • Ease of integration without significant IT spend • Structured interface with effective controls that still afford flexibility • RPA requires minimal programming allowing realization within weeks • Cost improvements of 30-70% or more • Automated solutions which do not sleep: on-demand potential to run 24x7x365 • Increase in speed and reduction in time required to perform processes Efficiency and cost $ $ • RPA & cognitive tools execute repeatable tasks identically every-time • Outputs are highly auditable and well documented • If mistakes occur they are usually systemic, so easily detected and rectified – applicable to Robotic Process Automation (less so for Cognitive Intelligence) High quality output • Automate highly manual turn-chair processes - relieve strain on human resources • Manual efforts reduced to an exception-basis to ensure quality • Human resources shift focus to subjective and higher value-added tasks Best use of scarce human resources

  26. Taking the next step Developing automation capabilities and charting the course for the finance organization takes a defined vision and a clear understanding of the organization “If organizations anticipate disruptive forcesand alter their strategy, leaders can take proactive steps and not only avoid being disrupted, but also become the disrupters in their industries.” Develop future state vision for digital controllership and automation 1 2 Define your current state capabilities Determine your technology architecture objectives / needs 3 - Chuck Saia, CEO, Deloitte Risk and Financial Advisory Define digital strategy for Core, Process Automation and Analytics & Insights 4 Develop roadmap with timing and milestones, including an automation pilot 5 8x Execute activities on a transition roadmap with agile sprints 6

  27. Key success factors and lessons learned Lessons learned are based on numerous engagements in this domain Select the right process or activity and ensure it emulates what a person would do Ensure that the process is well defined to ensure robotics can be implemented. Must also ensure that the part of the process which is chosen can be emulated by a robot just like it is by a person Conduct robust testing Business process testing is required to ensure that any issues which the robot may have when determining the next step can be identified. This is to ensure that the robot can ‘have their eyes open’ during the process 1 2 Ensure adequate education and user adoption approach There is a great need to ensure that the robots are adopted into the business and the need and result of these should explained thoroughly 6 Have a strong checklist in place regarding infrastructure and compliance requirements Ensure that the correct infrastructure is in place and compliance requirements have been met early on in the project 7 3 8 Do not automate broken processes Processes should be amended and made as efficient as possible before implementing robotics Invest in comprehensive stakeholder management Stakeholders need to be engaged from the programme’s outset to ensure effective buy-in, collaboration and adoption of changes Monitor the quality of the outputs and invest heavily in exceptions management The quality of the outputs from the robots must be continuously monitored to ensure that they are trustworthy. It is important to invest heavily in exceptions management for quality purposes. 4 9 Ensure vendor and business vision alignment The chosen IT vendor should meet the long term process automation requirements of the business Agree on up-front approach to measuring and tracking benefits delivered Strong focus should be afforded to ensure benefits of robotics are tracked and understood, with a detailed approach to measurement agreed prior to implementation 5 10 Consider wider strategic technology initiatives Selected automation of process should align with broader technological investment in the client’s overall IT strategy

  28. Q&A

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