Introduction
IFRS 17 was released in May 2017 and it is quite a complex standard. The standard replaces IFRS 4 (Insurance Contracts) – an interim standard – which does not particularly prescribe a measurement policy for insurance contracts. If you take a look at various insurance contracts around the world, you would find that they are accounted for using different measurement frameworks.
What the new standard does is that it tries to achieve a consistent insurance accounting framework, which inevitably means that there are a lot of changes for everyone who issue insurance contracts. This newsletter highlights the key provisions of IFRS 17, including its scope, recognition requirements, measurement models, disclosure requirements as well as an overview of the impact of the new standard.
Definition of insurance contract
The definition is the same as under IFRS 4 which is a contract under which one party (the insurer) 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.
Scope
IFRS 17 applies to:
- Insurance contracts, including reinsurance contracts, an entity issues – there are no significant changes in the scope compared to IFRS 4.
- Investment contracts with discretionary participation feature an entity issue, provided the entity also issues insurance contracts.
- Fixed fee service contract- An entity can make an irrevocable choice to apply IFRS 15 instead of IFRS 17 if these contracts meet pre-defined conditions. The choice can be made on a contract by contract basis.
- Financial guarantees- With these, IFRS 17 also provides a choice. If the insurance company previously asserted that these are insurance contracts under the previous insurance standard, then that continues under IFRS 17 but if they have previously been classified under the financial instrument standard, then the Company can carry on with that classification.
It is worthy to note that IFRS 17 will not only affect traditional insurance companies, but also health insurance providers, service providers that issue bundle products, such as telecom services provider that attached insurance products to its services.. Policyholder accounting is out of scope of IFRS 17 (except for reinsurance contracts held)
Initial recognition
On initial recognition, an entity shall measure a group of insurance contracts at the total of:
a) the fulfillment cash flows, which comprise:
i. estimates of future cash flows ;
ii. an adjustment to reflect the time value of money and the financial risks related to the future cash flows, to the extent that the financial risks are not included in the estimates of the future cash flows; and
iii. a risk adjustment for non-financial risk
b) the contractual service margin
The diagram on the next page provides an overview of activities to be performed when a contract is initially recognized.