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One to watch

The potential impact of the new accounting standard will be huge. Deloitte's Francesco Nagari explains which firms are most exposed and why.

It is not often that firms are given more time to prepare for a new International Financial Reporting Standard (IFRS). However, that’s what has happened with the new IFRS 15 Revenue from contracts with customers, which now has an effective date of 1 January 2018. The one-year reprieve indicates how far-reaching the Standard might be and the impact it may have across several industries.

The insurance industry will not be one of the hardest hit given the intensity of the work carried out on IFRS 4, which scopes out most of the contracts the sector issues with its customers. That said, some parts of the industry need to give careful consideration to the likely impact on revenue recognition and the unbundling of certain contracts.

Life insurers

A significant volume of life insurance contracts do not transfer insurance risk and offer a combination of asset management services and financial risk exposures to the customer. In a similar way to current practice the insurer will unbundle the contract and use IFRS 15 for the service revenue and the financial instruments standard IAS 39 or IFRS 9 for financial liability. Also similar is the capitalisation of commissions incurred to sell the service element of the contract.

The IFRS 15 requirements that need to be considered carefully in this scenario relate to the recognition of revenue over the service obligation period. These contracts are often delivered over a multi-year period and the more rigorous criteria in IFRS 15 can materially modify the timing for recognition of revenue.

By the same token, the amortisation of the capitalised commission may take a substantially different pattern to comply with the new IFRS 15 requirements. Given that the same issues would apply to any more traditional off-balance-sheet asset management services that an insurer may sell via a fellow subsidiary, investors would expect consistency in the consolidated financial statements.


As the middlemen between insurers and policyholders, intermediaries do not carry insurance contracts on their financial statements, meaning that the application of IFRS 15 is extensive in this sector. Intermediaries have evolved their business model significantly in the past two decades, adding services in response to diverse demands from their customers.

These services usually stem from the relationship generated by the placement of an insurance contract with a policyholder, for example, underwriting, claims processing and policy administration.

This calls for assessment of the distinct obligations between an intermediary and its customers. Materially different revenue recognition patterns may be required under IFRS 15 if those obligations have to be accounted for separately. The so-called post-placement obligations is an area where the IFRS 15 introduces extensive and more rigorous guidance on revenue.

The chief financial officers of life insurers and intermediaries need to be particularly aware of the potential changes to revenue recognition patterns that IFRS 15 could produce. These revenue recognition practices may change because IFRS 15 introduces a clearer set of principles or because it forces the unbundling of distinct obligations more extensively than before.

The good news is that the industry has an extra year before it has to comply with IFRS 15. This gives the most exposed businesses an opportunity to study the potential impact on their key financial metrics and communicate the impact of the new Standard to the market.