Are you ready for the fundamental overhaul of insurance accounting?
The International Accounting Standards Board (IASB) has issued a new standard which will have significant operational implications for companies.
International Financial Reporting Standard (IFRS) 17 Insurance Contracts replaces IFRS 4.
IFRS 17 is the first truly international IFRS standard for insurance contracts and provides consistent principles for all aspects of accounting for insurance contracts.
The objective of the standard is to remove inconsistencies and help investors, analysts and others to compare companies, contracts and industries.
The IASB has summarised the main areas of change as:
Comparability among companies across countries
Accounting for insurance contracts varies significantly between companies operating in different countries
Companies will apply consistent accounting for all insurance contracts
Comparability among insurance contracts
Some multinational companies consolidate their subsidiaries using different accounting policies for the same type of insurance contracts written in different countries
A multinational company will measure insurance contracts consistently within the group, making it easier to compare results by product and geographical area
Comparability among industries
Some companies present cash or deposits received as revenue which differs from accounting practice in other industries, in particular, banking and investment management
Revenue will reflect the insurance coverage provided, excluding deposit components, as it would in any other industry
IFRS 17 will apply 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).
IFRS 17 requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts.
A significant area of change for several companies is that IFRS 17 requires entities to recognise profits as they deliver insurance services (rather than when premiums are received) and to provide information about insurance contract profits expected to be recognised in the future.
The IASB has summarised the main measurement differences between IFRS 4 and IFRS 17 as:
Information about the value of insurance obligations
The measurement of contracts by some companies was based on out-of-date information
Insurance contracts to be measured at current value
There was no consideration of the time value of money by some companies
Companies will reflect the time value of money in estimated payments to settle incurred claims
Some companies measure insurance contracts based on the value of their investment portfolios
Companies will measure their insurance contracts based only on the obligations created by these contracts
Information about profitability
Some companies do not provide consistent information about the sources of profit recognised from insurance contracts
Companies will provide consistent information about components of current and future profits from insurance contracts
Many companies provide alternative performance measures
Companies and users of financial statements will use fewer non-GAAP measures; supplementary information will enable more meaningful comparisons
The IASB recognises that the application of IFRS 17 will have significant operational implications for companies. These include the costs which companies will incur to develop new systems and processes to produce and report the required information.
The IASB has therefore set the effective date as accounting periods beginning on or after 1 January 2021 to give companies time to prepare and consider the commercial impact of the standard.
A company can choose to apply the standard before that date, but only if it applies IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with Customers.
Due to the range of accounting methods in use today, some countries will see more significant changes than others with the introduction of the new standard.
It is key that companies begin to prepare now for the new standard which has the aims of improving comparability between companies and increasing the consistency of financial reporting.