IFRS 17 Insurance contracts
A new accounting standard (IFRS 17) has been issued for insurance industry and according to the experts it is seen as one of the most significant changes in insurance accounting in the past decade. IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted if IFRS 9 is also applied.
Generally, insurance contracts generate uneven cash over a long period and possesses attributes of both the service contracts and financial instruments. IFRS 17 is an attempt to provide appropriate information about these features.
- IFRS 17 combines current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract;
- IFRS 17 separates insurance finance income/expenses and presents insurance service results.
- IFRS 17 provide an entity with an option of to recognize all insurance finance income/expenses in profit or loss or to recognize such in other comprehensive income.
IFRS 17 includes an optional simplified measurement approach, or premium allocation approach, for simpler insurance contracts. However, it requires that other entities should:
- identify as insurance contract, those contracts under which the entity accepts significant insurance risk from the policyholder by agreeing to compensate the policyholder if an insured event adversely affects the policyholder.
- separate specified noninsurance components from insurance contract (e.g., embedded derivatives and distinct investment components to be accounted for under IFRS 9 and other noninsurance performance obligations under IFRS 15).
- Identify the portfolio of insurance contracts into groups that it will recognize and measure;
- recognize and measure the groups of insurance contracts at:
- a risk-adjusted present value of the future cash flows that incorporates all the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset)
- an amount representing the unearned profit in the group of contracts (the contractual service margin);
- recognize the profit over the period the entity provides insurance contract services, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognizes the loss immediately;
- presents separately insurance revenue, insurance service expenses and insurance finance income or expenses; and
- discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance, and cash flows of an entity.
IFRS 17 represents a fundamental shift in how insurers will account for their contracts and will require significant implementation work, as impacted companies must re-evaluate processes, controls, and technology. All stakeholders including the Government regulators are closely monitoring the progress.
As IFRS 17 will be applied retrospectively, it will impact both the fiscal years ending in 2022 and 2023 therefore, the implementation work on IFRS 17 needs to be done in 2021.
"The move to IFRS 17 is a significant undertaking for the insurance industry. We remain focused on ensuring that our regulatory and supervisory frameworks continue to be effective and remain up to date with the new standard."
Ben Gully, Assistant Superintendent, Regulation Sector