IFRS 17: Understanding the New Accounting Model and Its Impact

IFRS 17 is a new accounting model that aims to provide a more comprehensive and transparent view of insurance contracts. It was introduced by the International Accounting Standards Board (IASB) to replace the existing accounting standards for insurance contracts.

The new model requires insurance companies to recognize the full cost of insurance contracts on their balance sheets, including the expected losses and expenses. This is a significant change from the previous standards, which allowed insurance companies to defer the recognition of losses and expenses.

IFRS 17 also introduces a new concept called the "service margin", which represents the profit that an insurance company expects to make from a contract over its entire lifespan. This concept is designed to provide a more accurate picture of an insurance company's profitability.

The new model is expected to have a significant impact on the financial statements of insurance companies, and will require them to adopt new accounting practices and procedures.

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IFRS 17 marks a transformative shift in the accounting for insurance contracts.

It replaces IFRS 4, which is no longer effective.

Effective from January 1, 2023, IFRS 17 introduces a more transparent approach to financial reporting.

This new standard aims to provide a consistent and principle-based approach to accounting for insurance contracts.

IFRS 17 is issued by the International Accounting Standards Board (IASB).

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The key features of IFRS 17 include an integrated environment for managing, auditing, and tracing all steps of compliance processes.

This integrated environment helps ensure that all necessary steps are taken to comply with the new standard, making the process more efficient and effective.

The primary goal of IFRS 17 is to provide a uniform accounting framework that enhances the comparability and transparency of financial statements for entities issuing insurance contracts.

This uniform framework leads to greater transparency in financial statements, aiding stakeholders in understanding the insurer's financial performance and risk exposure.

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The detailed disclosure requirements of IFRS 17 lead to greater transparency in financial statements, making it easier for stakeholders to assess the effect of insurance contracts on an entity's financial position, performance, and cash flows.

By providing a basis for users of financial statements to assess the effect of insurance contracts, IFRS 17 helps stakeholders make more informed decisions about investments and other business activities.

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Implementation of IFRS 17 requires significant effort and changes in how insurance contracts are measured and reported. Companies may need to upgrade their systems and processes to accommodate the new data needs of IFRS 17, including tracking historical information to determine the contractual service margin.

Cross-functional collaboration between IT, actuarial, finance, accounting, and operations is crucial for a successful implementation effort. Companies can also benefit from gaining new insights from data analysis and reporting, and improving process efficiency.

To fast-track the IFRS 17 system implementation, follow these 5 key steps: Impact assessmentSoft designDetailed design and implementationReview and transitionTesting and transition

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The scope of IFRS 17 is quite specific, and it's essential to understand what's included and excluded from the standard. An entity shall apply IFRS 17 Insurance Contracts to insurance and reinsurance contracts that it issues.

Reinsurance contracts held by an entity are also within the scope of IFRS 17. Investment contracts with discretionary participation features (DPF) are included, but only if the entity also issues insurance contracts.

The scope of IFRS 17 excludes certain contracts, such as warranties issued directly by a manufacturer, dealer or retailer in connection with a sale of its goods or services to a customer.

Warranties, residual value guarantees, and financial guarantee contracts are not within the scope of IFRS 17, unless the issuer meets specific requirements and makes an irrevocable election to apply the standard.

Here's a summary of the scope of IFRS 17:

Implementation efforts for IFRS 17 will vary depending on the systems, methods, and data storage capabilities currently used by insurance companies. Companies may need to make significant changes to how insurance contracts are measured and reported.

Being able to group contracts to apply the general measurement model may require significant effort and changes in how insurance contracts are measured and how their results are reported to users. This is because some companies may currently measure insurance contracts at a portfolio level, which includes both profit-making and loss-making contracts.

Applying the general measurement model will require companies to track certain historical information to determine the contractual service margin. This includes tracking of discount rates to determine the present value of estimates of future cash flows.

Many legacy systems are still in use and may not be capable of accommodating the new data needs of IFRS 17, resulting in necessary systems and processes upgrades. Companies will also have to develop controls around any system and process changes and develop or upgrade existing controls for business as usual after transition.

A successful implementation effort will need cross-functional collaboration between IT, actuarial, finance, accounting, and operations. There are benefits for companies that take advantage of this opportunity to gain new insights from data analysis and reporting and to improve process efficiency.

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When implementing IFRS 17, it's essential to understand the level of aggregation required for insurance contracts.

An entity must identify portfolios of insurance contracts that are subject to similar risks and are managed together.

These portfolios must be divided into a minimum of three groups: contracts that are onerous at initial recognition, contracts with no significant possibility of becoming onerous subsequently, and the remaining contracts.

Contracts issued more than one year apart cannot be included in the same group.

However, if law or regulation constrains the entity's ability to set different prices or levels of benefits, those contracts can be included in the same group.

Here are the three required groups:

IFRS 17 has a significant impact on US companies, particularly those that are dual reporters. They will need to maintain at least two different sets of financial reporting records upon adoption of IFRS 17.

The accounting models under IFRS 17 differ greatly from US GAAP, requiring US companies to account for insurance contracts using IFRS 17. This will likely involve significant changes to their current practices.

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US companies will need to adjust to the explicit risk adjustment required as part of measurement under IFRS 17, which is not required under US GAAP. The disclosure requirements under IFRS 17 will also differ greatly from US GAAP.

The FASB is working on revising the disclosures for short-duration contracts, but those changes are likely to differ significantly from the requirements of IFRS 17.

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Noninsurance companies that issue contracts with insurance risks may be affected by IFRS 17. These companies can exclude certain contracts from the scope of IFRS 17, accounting for them like other service contracts with customers and financial guarantee contracts under financial instruments standards.

The definition of an insurance contract has not changed significantly from IFRS 4, but noninsurers that issue contracts meeting this definition will need to adapt to the new requirements. This may require involving actuarial resources and changing systems, processes, and controls.

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Companies making this election must do so on a contract-by-contract basis and cannot revoke their decision. This means they need to carefully consider which contracts to exclude and which to apply IFRS 17 to.

Noninsurance companies that issue contracts meeting the definition of an insurance contract and choose to apply IFRS 17 will no longer be able to use their preexisting accounting policies.

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US companies that apply IFRS may account for insurance contracts using US GAAP, but this option will no longer be available under IFRS 17.

This change will require dual reporters to maintain at least two different sets of financial reporting records upon adoption of IFRS 17, due to the different accounting models.

US companies are likely measuring their insurance contracts using groupings that do not meet the IFRS 17 grouping requirements.

The disclosure requirements under IFRS 17 also differ greatly from US GAAP, which will require additional effort and resources from US companies.

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The FASB has revised the disclosures for short-duration contracts, but those changes are likely to differ significantly from the requirements of IFRS 17.

Many US companies that are subsidiaries of foreign companies are waiting on instructions from their foreign headquarters, while others may need to address potential changes to the accounting and disclosures for long-duration insurance contracts under US GAAP, as well as statutory accounting requirements.

Companies should consider these changes and their related effects on their people, processes, and systems holistically.

Implementation of IFRS 17 requires significant effort, especially if your company currently measures insurance contracts at a portfolio level that includes both profit-making and loss-making contracts.

Companies will need to track historical information to determine the contractual service margin, which may require upgrades to legacy systems that are not capable of accommodating the new data needs.

A successful implementation effort will need cross-functional collaboration between IT, actuarial, finance, accounting, and operations, and will require significant investment in solutions that achieve efficiencies.

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Flexible implementation options are available, allowing you to implement your IFRS 17 project gradually and accommodate the evolution and maturation of processes over time.

To fast-track IFRS 17 system implementation, identify the areas of your legacy systems that are most in need of upgrading and be prepared to make necessary compromises to get over the line.

The shift from design to implementation is a pivotal period in the preparations for IFRS 17, and requires determining what 'good' looks like and turning high-level designs into action plans.

Testing and transition will be crucial in ensuring a smooth implementation, and 2021 is a key year for IFRS 17, so it's essential to plan accordingly.

IFRS 17 should be applied retrospectively wherever possible, but where this isn't possible, there are choices available that involve trade-offs between the level of future profit, the impact on equity, and operational considerations.