This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our privacy statement for more information on the cookies we use and how to delete or block them.
Article:

IFRS 17 Insurance Contracts delayed until 2023

24 July 2020

On 25 June 2020, the International Accounting Standards Board (IASB) issued final amendments to IFRS 17 Insurance Contracts, following the conclusion of its deliberations on the comments received from stakeholders on its exposure draft published in June 2019. The amendments are aimed at reducing costs of implementation, making financial performance easier to explain and easing the transition requirements.

Implementation delayed

One of the major changes relates to the effective date of IFRS 17 which has been deferred by two years. The new standard will now be effective for annual reporting periods beginning on or after 1 January 2023 (with early application permitted) rather than 1 January 2021 as originally envisaged.

To coincide with this new effective date, an amendment has also been made to the previous insurance standard, IFRS 4 Insurance Contracts. This amendment extends the ability to use the overlay approach and also the temporary exemption from applying IFRS 9 Financial Instruments to annual reporting periods beginning on or after 1 January 2023. This means that insurers will still be able to apply IFRS 17 and IFRS 9 at the same time thus reducing implementation costs and possibly accounting mismatches. 

These deferrals are because of the amount of time that it is taking preparers to implement IFRS 17’s requirements.

Further key changes

Area of IFRS 17

Amendments/Implications

Scope:

Credit card contracts (or similar contracts) and specified contracts such as loans with death waivers

 

  • Credit card contracts, or similar contracts that provide credit or payment arrangements, that meet the definition of an insurance contract, are excluded from the scope of IFRS 17 unless the insurance coverage is a contractually separate feature embedded in the contract.
  • An entity shall choose to apply either IFRS 17 or IFRS 9 to specified contracts (such as loans with death waivers) that it originates or purchases unless such contracts are otherwise excluded from the scope of IFRS 17. This choice should be made for each portfolio of insurance contracts and is irrevocable.
  • This means that some entities will be able to avoid the cost of implementing IFRS 17, which may be more than the costs that they would incur by implementing IFRS 9.

Recognition of insurance acquisition cash flows

  • IFRS 17 now requires a portion of acquisition cash flows to be allocated to anticipated contract renewals. The portion of cash flows allocated to anticipated renewals would be recognised as a separate asset and subject to impairment tests until the anticipated insurance contracts are recognised.
  • This effectively serves to minimise the risk of groups of insurance contracts becoming onerous solely due to acquisition cash flows that relate to future renewals.
  • The amendment includes guidance for transitional provisions relating to the recognition of an asset for acquisition cash flows retrospectively as at the transition date.
  • For insurance contracts acquired in a business combination or an asset acquisition, entities are also required to recognise an asset for such insurance acquisition cash flows and measure this at fair value as at the date of acquisition.

Contractual Service Margin (CSM)

 

 

  • This amendment is for groups of insurance contracts without direct participation features that would otherwise be subject to IFRS 17’s general measurement model. The amendments provide for the CSM to be allocated on the basis of coverage units, which are determined after considering insurance coverage provided and any service relating to investment activities which generates investment return for the policyholder (the 'investment return services') in certain instances.  
  • This effectively means that, under the amendment, there can be investment-return services for insurance contracts without direct participation features and this is now included in profit recognition.
  • Hence, the resulting profit emergence should better reflect performance of the insurance products and the investment services provided to policyholders, in a more aligned manner.

Reinsurance Contracts held:

Recovery of losses on underlying insurance contracts

  • IFRS 17 requires the recognition of a gain on reinsurance contracts held when the underlying insurance contracts are onerous. The recognition of such a gain only applies when the reinsurance contract held is recognised before or at the same time as the loss arising on the underlying insurance contracts.
  • This should result in better alignment between the timing of onerous underlying insurance contract losses and the right to recoveries from reinsurance contracts held. 

Presentation of Insurance Contracts

 

  • IFRS 17 presentation requirements were amended such that the presentation of insurance contracts and reinsurance contracts would be at a portfolio level, rather than based on groups of insurance contract assets and insurance contract liabilities separately.
  • This amendment relates only to the presentation requirements. The underlying measurement requirements of IFRS 17 remain unchanged and are based on groups - and therefore annual cohorts – of insurance contracts.

Interim Financial Reporting in applying IAS 34

  • An entity shall make an accounting policy choice as to whether to change the treatment of accounting estimates made in previous interim financial statements, when applying IFRS 17 in subsequent interim or annual financial statements.


Next steps

While the amendments to IFRS 17 do not address every issue raised by stakeholders, they do address many of the concerns raised and provide clarity to preparers and financial statement users on the timing of transition to IFRS 17.

Entities will need to carefully consider the impact of these new amendments on all aspects of their current IFRS 17 implementation projects. More information on the amendments may be found in our International Financial Reporting Bulletin, IFRB 2020/10.