IFRS 17 provides guidance on accounting for insurance contracts. It is set to replace IFRS 4, which currently governs accounting for insurance contracts.
The purpose of IFRS 17 is to provide investors and analysts with a more transparent and consistent view of insurance companies’ financial performance and risk exposure. IFRS 17 requires insurance companies to recognize and measure insurance contracts on their balance sheet at their fair value, rather than at historical cost as is currently permitted under IFRS 4.
The standard also requires companies to provide more detailed information about their insurance contracts, including the risks they face, the assumptions they make, and the judgments they use to measure and recognize those contracts. IFRS 17 is expected to significantly change the way insurers report their financial results, and it will require significant effort from the insurance industry to implement.
- Provide a single, principles-based approach to the accounting for insurance contracts
- Reflect the economic substance of insurance contracts by requiring companies to measure them based on the present value of future cash flows, including the time value of money, the risk associated with the cash flows, and the effects of financial leverage
- Improve comparability and transparency of financial statements by requiring consistent accounting treatment for similar insurance contracts and requiring disclosure of the nature, amount, timing and uncertainty of cash flows from insurance contracts
- Simplify the accounting for insurance contracts by removing the options and alternatives that existed under previous accounting standards and providing clear guidance on the accounting treatment for insurance contracts.
An entity shall apply IFRS 17 Insurance Contracts to [IFRS 17:3]
Ø Insurance contracts, including reinsurance contracts, it issues;
Ø Reinsurance contracts it holds; and
Ø Investment contracts with discretionary participation feature it issues, provided the entity also issues insurance contracts.
Some contracts meet the definition of an insurance contract but have as their primary purpose the provision of services for a fixed fee. Such issued contracts are in the scope of the standard unless an entity chooses to apply to them IFRS 15 Revenue from Contracts with Customers and provided the following conditions are met: [IFRS 17:8]
(a) the entity does not reflect an assessment of the risk associated with an individual customer in setting the price of the contract with that customer;
(b) the contract compensates the customer by providing a service rather than by making cash payments to the customer; and
(c) the insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services.
An entity shall recognise a group of insurance contracts it issues from the earliest of the following: [IFRS 17:25]
(a) the beginning of the coverage period of the group of contracts;
(b) the date when the first payment from a policyholder in the group becomes due; and
(c) for a group of onerous contracts, when the group becomes onerous.
On initial recognition, an entity shall measure a group of insurance contracts at the total of [IFRS 17:32]
(a) the fulfilment cash flows (“FCF”), which comprise:
(i) estimates of future cash flows;
(ii) an adjustment to reflect the time value of money (“TVM”) and the financial risks associated with the future cash flows; and
(iii) a risk adjustment for non-financial risk
(b) the contractual service margin (“CSM”).
An entity shall include all the future cash flows within the boundary of each contract in the group. The entity may estimate the future cash flows at a higher level of aggregation and then allocate the resulting fulfilment cash flows to individual groups of contracts. [IFRS 17:33]
The estimates of future cash flows shall be current, explicit, unbiased, and reflect all the information available to the entity without undue cost and effort about the amount, timing and uncertainty of those future cash flows. They should reflect the entity’s perspective, provided that the estimates of relevant market variables are consistent with observable market prices. [IFRS 17:33]
Recognition and presentation in the statement(s) of financial performance
An entity shall disaggregate the amounts recognised in the statement(s) of financial performance into: [IFRS 17:80]
(a) an insurance service result, comprising insurance revenue and insurance service expenses; and
(b) insurance finance income or expenses.
The income or expenses from reinsurance contracts shall be presented separately from the expenses or income from insurance contracts.
Insurance service result
In its profit or loss statement, an entity must show how much money it made from the groups of insurance contracts it sold and how much it spent on claims and other insurance service costs related to the groups of insurance contracts it sold. Any investment components must be left out of revenue and insurance service costs. A business can’t include premiums in its profit or loss if that information doesn’t match up with the money it brings in.
Insurance finance income or expenses
Insurance finance income or expenses comprises the change in the carrying amount of the group of insurance contracts arising from: [IFRS 17:87]
(a) the effect of the time value of money and changes in the time value of money; and
(b) the effect of changes in assumptions that relate to financial risk; but
(c) excluding any such changes for groups of insurance contracts with direct participating insurance contracts that would instead adjust the CSM.
An entity has an accounting policy choice between including all of the insurance finance income or expense for the period in profit or loss or disaggregating it between an amount presented in profit or loss and an amount presented in other comprehensive income (“OCI”).
Under the general model, disaggregating means presenting in profit or loss an amount determined by a systematic allocation of the expected total insurance finance income or expenses throughout the group of contracts. On derecognition of the group, amounts remaining in OCI are reclassified to profit or loss.
Under the VFA, disaggregating is only allowed for direct par insurance contracts where the entity owns the underlying items. This is done by showing in profit or loss as insurance finance income or expenses an amount that matches the accounting income or expenses that come from the underlying items. When the groups are no longer recognised, the amounts that were once recognised in OCI stay there.
An entity shall disclose qualitative and quantitative information about: [IFRS 17:93]
(a) the amounts recognised in its financial statements that arise from insurance contracts; (b) the significant judgements and changes in those judgements made when applying IFRS 17; and (c) the nature and extent of the risks that arise from insurance contracts.