This guide help non-insurers determine whether, and to what extent, they may be affected by the standard.
IFRS 17 Insurance Contracts addresses the accounting for insurance contracts, not insurance business or insurance entities. Some entities that are not insurers will find that IFRS 17 does apply to them.
These FAQs provide guidance to help non-insurers determine whether, and if so to what extent, they may be affected by the new standard. The FAQs therefore focus on:
- the definition of an insurance contract; and
- the available scope exemptions and whether they might apply.
This guidance is designed to introduce the key considerations for non-insurers approaching IFRS 17 for the first time; it does not cover all scenarios or type of contract and is not a substitute for detailed consideration of the standard.
IFRS 17 is mandatory for accounting periods beginning on or after 1 January 2023. The standard must be adopted retrospectively and applied to the comparative period, meaning 1 January 2022 will be the transition date for calendar year-end companies.
IFRS 17 has potentially significant implications for both accounting and reporting. In addition, non-insurers should consider any resulting impact on information systems, processes and internal controls as soon as possible if they have not already done so.
1 What sort of contracts issued by non-insurers might fall in scope of IFRS 17?
Types of contract commonly issued by non-insurers which might involve the transfer of insurance risk, and so fall within the scope of IFRS 17 include:
- product warranties
- financial and other guarantees
- maintenance contracts
- breakdown services
- service contracts
- credit cards
- loan contracts with death waivers
However, IFRS 17 includes a number of scope exceptions and policy choices which should mean that most non-insurers will not need to apply IFRS 17 to the insurance contracts they issue. More information on scope exceptions and the options available are set out in questions 6 to 10 below.
2 How do I determine if my entity has issued an insurance contract?
Appendix A of IFRS 17 defines an insurance contract as: “A contract under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”
There are four main steps to determine whether a contract falls within the definition of an IFRS 17 insurance contract:
- The first step is to confirm the existence of a contract. A contract is an agreement between two or more parties that creates enforceable rights and obligations. It can be written, oral or implied by the entity’s customary business practices.
- The second step is to determine whether the arrangement will compensate the policyholder for a specified uncertain future event. The uncertainty surrounding the event as to its occurrence, timing or severity is the essence of the insurance contract. Compensation could be in cash or in kind.
- Step three is to ascertain whether the specified uncertain event adversely effects the policyholder. Detailed guidance on the meaning of ‘adversely affects the policyholder’ is set out in question 5
- Finally, one must consider whether the issuer accepts significant insurance risk transferred from the policyholder. The term ‘significant insurance risk’ is a key part of the definition of an insurance contract. Further guidance on this is set out in question 4.
3 What is ‘insurance risk’?
4 When is insurance risk ‘significant’?
Insurance risk is considered significant if there is a scenario that has commercial substance, in which there is a possibility that the issuer of the contract:
- could suffer loss on a present value basis, and
- pay significant additional amounts beyond what would be paid if the insured event had not occurred, on a present value basis.
This condition can be met even if the insured event is extremely unlikely. IFRS 17 does not provide guidance on quantification of ‘significance’ of insurance risk, which may require judgement from management.
5 What does ‘adversely affects the policyholder’ mean?
The definition of an insurance contract requires the insured event to have an adverse effect on the policyholder (in other words, the policyholder must have an insurable interest). This is an important element in differentiating insurance contracts from derivatives accounted for as financial instruments. The holder of a derivative may receive payments under the contract whether or not they have been adversely affected by a specified event. To be insurance, however, an adverse effect on the policyholder must be a contractual precondition for payment.
6 Are all warranties in scope of IFRS 17?
A warranty might result in replacement of an item or the provision of a service to ensure that a product or service complies with agreed specifications. Such warranties generally meet the definition of an insurance contract. However, when warranties are issued directly by a manufacturer, dealer or retailer in connection with a sale of its goods and services, they are excluded from the scope of IFRS 17.
For example, a warranty issued directly by a car manufacturer to its customer would fall under the IFRS 17 scope exception and would therefore be treated in accordance with IFRS 15 Revenue from Contracts with Customers and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. However, if the customer buys an extended warranty for which cover is provided (whether in the form of cash or the provision of services) by a third party rather than the manufacturer or car dealer, then the party providing the cover (the underwriter) would account for the extended warranty under IFRS 17.
To continue the example above, if the customer is buying the extended warranty from an entity within the same group as the manufacturing entity, it would also be accounted for under IFRS 17 in the individual accounts of that entity providing the extended warranty. However, from a group perspective the warranty and the extended warranty are provided by the same reporting entity and the scope exemption will, therefore, apply in the consolidated accounts.
7 What other scope exceptions are there?
In overview, the other types of contract excluded from IFRS 17’s scope are:
- Insurance contracts in which the entity is the policyholder, unless those contracts are reinsurance contracts.
- Employers’ assets and liabilities from employee benefit plans; these are accounted for under IAS 19 Employee Benefits or IFRS 2 Share-based Payment as appropriate.
- Contractual rights or obligations contingent on the future use of, or the right to use, a non-financial item (for example, some licence fees, royalties, variable and other contingent lease payments and similar items). These are covered by IFRS 15 Revenue from Contracts with Customers, IAS 38 Intangible Assets and IFRS 16 Leases.
- Residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s residual value guarantees when they are embedded in a lease. These are covered by IFRS 15 and IFRS 16.
- Financial guarantee contracts; these are out of scope unless the issuer has met certain requirements as set out in IFRS 17.7(e) and made an irrevocable election to apply IFRS 17 to the contract.
- Contingent consideration payable or receivable in a business combination – this is covered by IFRS 3 Business Combinations.
- Credit card contracts, or similar contracts that provide credit or payment arrangements, that meet the definition of an insurance contract if, and only if, the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer. Such contracts fall within the scope of IFRS 9 Financial Instruments.
IFRS 17 also permits entities to make a policy choice regarding the treatment of fixed fee service contracts (see question 8) and loans with death waivers (see question 9). Providing certain criteria are met, these types of contracts may be accounted for in accordance with standards other than IFRS 17.
8 How do you treat intragroup insurance contracts?
In its own individual financial statements, an entity issuing an insurance contract to other entities within the same group will need to account for the contract in accordance with IFRS 17. However, as required by IFRS 10 Consolidated Financial Statements, from a group perspective the entities are treated as the same reporting entity and so the intragroup contract is eliminated on consolidation.
If a group entity pays premiums to a third-party insurer that is outside of the group, the transaction will be reflected within the individual and consolidated accounts. However, as the entity is the policyholder rather than the issuer, the insurance contract will be outside the scope of IFRS 17 (see question 7).
9 What are fixed fee service contracts and how must they be accounted for?
Fixed fee service contracts are contracts which meet the definition of an insurance contract but which have, as their primary purpose, the provision of services for a fixed fee. Examples include roadside assistance programmes (breakdown services) and equipment repair and maintenance contracts.
In such scenarios, the breakdown of the vehicle or equipment is uncertain as to whether or when it will occur. When it does occur it adversely affects the customer and the service provider compensates the customer for that adverse effect. Furthermore, the fact that the compensation to the customer is given in the form of goods or services, rather than in cash, does not prevent the contract from meeting the definition of an insurance contract.
However, while fixed fee service contracts meet the definition of an insurance contract, entities may elect to apply IFRS 15 to such contracts if they meet the conditions set out in IFRS 17.8. The election is made on a contract by contract basis, but in each case the choice is irrevocable.
10 What are loans with death waivers and how must they be accounted for?
Loans with death waivers include contracts such as student loans and equity release mortgages in which recourse is limited to the outstanding loan amount. Under equity release mortgages, when the borrower dies, the mortgaged property would typically be sold and the proceeds used to repay the mortgage. The issuer is not entitled to any excess proceeds but bears the cost of any shortfall if the sales proceeds are not enough to cover the outstanding principal and accrued interest.
IFRS 17 permits entities to apply IFRS 17 or IFRS 9 to contracts that meet the definition of an insurance contract but that limit the compensation for insured events to the amount otherwise required to settle the policyholder’s obligation under the contract. Loans with death waivers (including student loans) are examples of such contracts. The choice can be made for each portfolio of contracts and for each portfolio the choice made is irrevocable.
11 How do I account for contracts that fall within the scope of the standard?
IFRS 17 contains a ‘general measurement model’ as the default approach to measuring groups of insurance contracts.
The standard also includes a simplified approach (the premium allocation approach) that applies to contracts meeting certain criteria - generally those with a coverage period of one year or less. Non-insurers with insurance contracts that do not qualify for the scope exceptions may find that they qualify for the simplified approach, which produces a similar accounting outcome to that of IFRS 15.
Further detail on the measurement of insurance contracts under IFRS 17 can be found in the faculty’s factsheet IFRS 17 Insurance Contracts for non-insurers. The recognition and measurement requirements of the standard can be complex and entities may consider obtaining specialist advice.
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