The International Accounting Standards Board (IASB) has issued International Financial Reporting Standard (IFRS) 17, Insurance Contracts, described by the IASB as a ‘fundamental overhaul of insurance accounting’. IFRS 17 replaces IFRS 4, Insurance Contracts, and in contrast to IFRS 4, IFRS 17 provides comprehensive guidance on accounting for insurance contracts.
The IASB had issued IFRS 4 as an interim standard that permitted companies to continue their accounting practices for insurance contracts and focused on enhancing disclosures on the amount, timing and uncertainty of future cash flows from insurance contracts. A significant problem with IFRS 4 is that it resulted in a multitude of different approaches, making it difficult for investors to compare the financial performance of insurance companies.
The new standard is expected to solve the comparison problem by requiring insurance contracts to be accounted for consistently. The most significant change is that insurance obligations will be accounted for using current values rather than historic cost. As noted in the IFRS 17 Fact Sheet published by the IASB, companies must “measure insurance contracts based on updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts”.
Because the changes are so extensive, the IASB has provided for a three-and-a-half year introduction period for IFRS 17 to give insurers time to implement the changes for accounting periods ending in 2021.
Under the new approach:
- Insurance contracts generally are to be measured as the sum of fulfilment cash flows (the present value of probability-weighted expected cash flows plus an explicit risk adjustment for insurance risk) and a contractual service margin (the unearned profit from the contract)
- Profits are recognised over time as insurance services are provided
- Losses are recognised immediately when expected
- Insurance contracts are aggregated in groups for measurement.
IFRS 17 is effective from 1 January 2021, with early adoption permitted. In applying the standard for the first time, companies are to take a full retrospective approach, but where that is impractical, IFRS 17 provides for use of a modified retrospective approach or a fair value approach.
The IFRS 17 project page, with links to the final IFRS, a Basis for Conclusions, the IFRS Fact Sheet and to additional significant due process documents, is available on this link.
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