The next steps firms need to take for IFRS 17
Zsuzsanna Schiff takes a look at the much-anticipated IFRS 17 exposure draft proposals.
After a two-year extensive outreach programme and wide-ranging discussions within the industry, the International Accounting Standards Board (IASB) issued its exposure draft (ED) in June, with a list of proposed amendments to IFRS 17. These include:
Deferral of the effective date
- companies would be required to apply IFRS 17 from 1 January 2022 instead of 2021;
- all insurers using IFRS would be required to apply IFRS 9 from 1 January 2022.
Additional scope exclusions
A company would be:
- permitted to apply IFRS 9, instead of IFRS 17, to loan contracts that meet specified criteria – for example equity release mortgages;
- required to apply IFRS 9, instead of IFRS 17, to credit card contracts that meet specified criteria.
Allocation of acquisition costs to expected contract renewals
This is expected to avoid the presentation of some insurance contracts as loss-making at initial recognition and result in the presentation of a larger longer-lived asset for acquisition costs in the balance sheet.
A company would:
- allocate part of the acquisition costs (such as commissions paid to brokers) to related expected contract renewals;
- recognise those costs as an asset until the company recognises contract renewals;
- assess the recoverability of the asset at each reporting date; and
- provide information in the notes to the financial statements.
Attribution of profit to service relating to investment activities
A company would:
- recognise the expected profit for insurance contract services in profit or loss as both insurance coverage and any service relating to investment activities (investment-return service) are provided over time; and
- provide information in the notes to the financial statements. The proposed amendment would change the timing of profit recognition for insurance contract services for some contracts.
Extension of the risk mitigation option
IFRS 17 will permit a company to use the risk mitigation option when reinsurance contracts are held to mitigate financial risks of insurance contracts with direct participation features.
Reduced accounting mismatches for reinsurance
A company that recognises losses on loss-making insurance contracts on initial recognition would at the same time also recognise a gain on reinsurance contracts held, to the extent that the reinsurance contracts held:
- cover the claims of the insurance contracts on a proportionate basis (ie a fixed percentage of claims is recovered); and
- are entered into before or at the same time the loss-making insurance contracts are issued.
This proposed amendment is expected to result in losses from insurance contracts issued and the recoveries of those losses from proportionate reinsurance contracts held to be recognised in the same period.
Simplified balance sheet presentation
The Board proposes to amend IFRS 17 to require a company to present insurance contract assets and insurance contract liabilities on the balance sheet using portfolios rather than groups of insurance contracts. This would reduce the size of insurance contracts assets presented on the balance sheet.
Additional transition reliefs
The Board proposes to add three simplifications to IFRS 17 for the benefit of companies when applying the standard for the first time:
- Business combinations: in some circumstances a company would be permitted to account for liabilities for claims settlement acquired in a business combination as a liability for incurred claims, rather than as a liability for remaining coverage.
- Risk mitigation from the transition date: company that designates risk mitigation relationships before the date of transition to IFRS 17 would be permitted to apply the risk mitigation option to those relationships from the date of transition to IFRS 17.
- Risk mitigation and fair value transition approach: a company would be permitted to use the fair value transition approach to measure a group of insurance contracts at transition that would otherwise be accounted for retrospectively. This approach would be permitted if the company meets certain criteria.
These amendments are proposed in response to industry feedback as well as the IASB’s monitoring on insurers’ implementation progress. They are likely to get a mixed reception from insurers. Entities far into the implementation process may not appreciate further delays to the effective date and/or substantial changes to the previously issued IFRS 17.
The broad agreement within the industry is that the proposed amendments are helpful but still they do not go far enough. Additionally, some claim that there are still significant areas in accounting for insurance contracts that will allow for diverse practice.
However, the IASB is under pressure to finalise the standard. The amendments aim to ease implementation costs and make it easier for companies to explain the results of applying IFRS 17 to investors and others.
ICAEW is responding to the IASB’s consultation on the proposed amendments based on extensive discussions with industry experts. We held a seminar on 12 September 2019 to discuss the changes brought on by IFRS 17 itself and the proposed amendments.
About the author
Zsuzsanna Schiff is manager of auditing and reporting at the Financial Services Faculty