IFRS 17 INSURANCE STANDARD Scope REPORT

Objective of this report

• The report is developed in order to provide a perception of the new insurance contracts standard and provide a bird’s-eye view from an implementation standpoint.

Overview of IFRS 17

• IFRS 17 is the new insurance standard which is issued by International Accounting Standards Board (IASB) in May 2017. It would replace the existing interim insurance standard IFRS 4.
• Early adoption is permitted for the implementation of IFRS 17 as long as IFRS 9 and IFRS 15 are also applied. The effective date of implementation is January 1, 2023.
• Companies are required to restate comparative information for one year.
• Significant amount of effort would be required from accounting teams, business teams, IT and other appropriate departments to make a successful adoption of the new standard.

Objective of IFRS 17

• To provide guidance for the recognition, measurement, presentation and disclosure of insurance contracts [IFRS 17.01].
• The new insurance standard aspires to standardize insurance contracts and its accounting globally with a vision to improve the comparability, transparency, and understandability of how insurance contracts are reported in financial statements across industries and other jurisdictions.
• The standard would provide users to assess financial statements so as to achieve the full effect of insurance contracts on a company’s financial position, financial performance and cash flows [IFRS 17.01].

Insurance Contract definition

• 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 [IFRS 17 Appendix A].
• A standard insurance contract revolves around legal enforceability between the insurer and the insured (policyholder). The insurer has legal binding to pay claims to the insured, in return of periodic premiums paid by the insured.     

Who should follow IFRS 17?

• A company will apply IFRS 17 to [IFRS 17.03]:
  • Insurance contracts,
  • Reinsurance contracts it holds, and
  • Investment contracts with discretionary participation features it issues, as long as the company also issues insurance contracts.

Circumstances where IFRS 17 should not be followed

• A company should not apply IFRS 17 to [IFRS 17.07]:
  • Warranties provided by manufacturers (IFRS 15 Revenue from Contract with Customers)
  • Retirement benefit obligations (IAS 19 Employee Benefits, IFRS 2 Share-based Payment & IAS 26 Accounting and Reporting by Retirement Benefit Plans)
  • Contractual rights (IFRS 15 Revenue from Contract with Customers, IAS 38 Intangible Assets, and IFRS 16 Leases)
  • Residual value guarantees (IFRS 15 and IFRS 16)
  • Contingent consideration payable or receivable in a business combination (IFRS 3 Business Combinations)
  • Insurance contracts held by an entity, unless those contracts are reinsurance contracts
  • Financial guarantee contracts – IFRS 17 or IFRS 9 Financial Instruments
  • Specified fixed-fee service contracts – IFRS 17 or IFRS 15 Revenue from Contracts with Customers
• This is not a change from IFRS 4.

Implementation perspective – Scope

• An entity should make the decision to apply IFRS 17 or other applicable standards on a contract by contract basis. An organization should pin down all the necessary parameters needed for IFRS 17 implementation in collaboration with the business and accounting team. Essentially, a scoping document could be the foundation for a successful transition plan from a micro level.
• I would envision an organization to develop a scoping document in the research phase of the project to collect all the data points necessary for successful implementation.
• The data collection methodology should be a combination of reading or scanning through the legal agreements to obtain the required data points and also use of technology to speed up the process.
• A company could assess the insurance contracts from the beginning of time for a complete assessment, in order to obtain a comprehensive picture surrounding if/how/why a contract falls into IFRS 17 insurance standards.

Separating components from an insurance contract

• In many circumstances, insurance contracts will probably contain one or more components which belong to other IASB standards if they were tailored to separate contracts [IFRS 17.10].
• A company will need to segregate components of other applicable standards such as IFRS 9 or IFRS 15.
• A company is prohibited from separating further non-insurance components.

Implementation perspective – components

• An organization needs to spend adequate amount of time in order to separate specific components of IFRS 17 standards, depending on the complexity of the legal agreements. Components which are part of other applicable standards could be ignored for the implementation purposes.
• Although insurance contracts within an industry or company could have a lot of similarities with features of boilerplate language, each contract is expected to have its own designs to meet specific needs and objectives.  Thus, experts should be brought forward to work together who has a solid understanding of the IFRS 17 and contracts in general.

Final words for the article

• Implementing any new accounting standard is challenging and IFRS 17 is no different. I would recommend a mindset of continuous learning and development with strong project management skills. An organization need to navigate resources of accounting departments, business units and enhance systems in an efficient and effective way for a successful implementation.

References:

Click to access IFRS17.pdf