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IASB issues IFRS 17 in insurance accounting shake up

The profession has welcomed IFRS 17, issued by the International Accounting Standards Board (IASB), however it warned of the complexity and cost of implementation for businesses.   

IFRS 17, which will be effective 1 January 2021, will replace the interim standard IFRS 4, issued in 2004, which allowed companies to use national accounting standards for insurance contracts. IFRS 4 resulted in a variety of different approaches internationally, which proved difficult to compare financial performance for the investors.

IFRS 17 requires all insurance contracts to be accounted for consistently, therefore aiming to solve the comparison problems created by IFRS 4. Some countries will see more significant changes than others due to their varying national accounting standards previously used. The standard will create a single reporting model for 450 listed companies worldwide responsible for an estimated $13tr in assets, the IASB announced.

“The scope of this standard is limited because it applies only to the relatively restricted number of insurance companies, but they do form a very significant sector in the economy,” ACCA head of corporate reporting Richard Martin commented.

IFRS 17 applies to all insurance contracts, including those covering short-term policies (such as motor insurance) and longer-term policies (such as term assurance, endowments and annuities).  It requires insurers to provide a balance sheet valuation of liabilities, including probability weighting on future cash flow, risk, and profit of services provided. The IASB has stated that the complexity of IFRS 17 means that companies will need to start preparing for implementation very soon, as insurers will be required to estimate historical amounts when transitioning.

Many professionals in public practices or in professional bodies welcome the new standards. ACCA’s Martin called it a significant moment, while PwC global IFRS insurance leader Alex Bertolotti described it as the biggest shake up of insurance reporting for decades.

However the profession is not oblivious to the challenges ahead for their clients in the insurance industry.

Deloitte UK IFRS 17 accounting lead Mark McQueen pointed at the costs of implementation saying that for many insurers they would be “as large as those incurred in the European Union for the adoption of the Solvency II regulations - estimated between three and four billion Euros for the EU insurers as a whole”.

Beyond costs, EY global insurance finance, risk and actuarial leader Martin Bradley highlighted the complexity of implementing IFRS 17 for insurance companies. “The insurance industry will now have to change the way in which insurance liabilities are measured, with higher levels of disclosure,” he said. “These changes will coincide with other changes to the reporting for financial assets under IFRS 9 Financial Instruments, and will potentially bring more volatility in reported profit.”

EY expects that this will trigger a “landmark shift” in the financial reporting of insurers and those providing long-term contracts will be most affected. Insurers may defer IFRS 9 on financial instruments and implement both standards at the same time.

EY global IFRS 17 accounting change lead Kevin Griffith said: “Understanding the commercial impact of IFRS 17, and reconciling reported results and equity with the equivalent numbers computed under regulatory and other reporting frameworks (like Solvency II and Embedded Value) will be important. New systems and processes will have to be built and ultimately, the implications of IFRS 17 will go well beyond the reporting function.”

ACCA’s Martin also pointed at the difficulty for companies to collect and report the data differently, but added that investors and other users will also have to adapt. “Despite the long development period not all parties may be content with all aspects of the new standard,” he added. “Though we think that all should recognise that consistent accounting treatments will be a major advancement, and the imperfections perceived by some are an inevitable price that has to be paid.”

To assist in the transition, the IASB has announced the establishment of a Transition Resource Group to support the implementation of the standard. Other materials accompanying the standard will include an effects analysis showing costs and benefits, a project summary, and a feedback statement of the consultation period.

ICAEW head of the financial services faculty Iain Coke said issuing the standard was not the end of the story but only the beginning of the next phase. He believes IFRS 17 will be “as challenging as creation”.  Therefore, Coke added that the Implementation Transition Group has a very important job to do in the run up to implementation and that then the standard also needs to be tested in action.

Meanwhile, the IASB has also published for public consultation the proposed IFRS Taxonomy Update for IFRS 17, the comment deadline is 18 September 2017.

More information on IFRS insurance contracts can be found here.

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