The International Accounting Standards Board (IASB) introduced IFRS 17 in May 2017 for an accounting of insurance contracts. Since then, IASB has been involved in promoting the proper implementation of the standard, simultaneously observing the challenges posed to insurers and relevant stakeholders.
Therefore, to help make the process of implementation easier for insurers, IASB proposed certain amendments. In June 2019, the board issued an exposure draft acknowledging concerns and challenges raised by stakeholders. The new amendments have been put forth with the aim to enhance comparability, improve transparency on business profitability and produce an in-depth report card on entities’ financial position.
Besides, the revision to the standard will also reduce the cost and effort of preparing for IFRS 17. This will also lessen the complexity for insurers in explaining their financial outcomes to investors.
The Key Amendments
After monitoring the implementation of IFRS 17, IASB recognised 25 areas of the standard that faced implementation challenges by stakeholders. The board established guidelines for proposing amendments and eventually concluded by focusing on seven areas for possible revisions. In addition, the board also determined several other minor amendments to simplify the expression of the standard.
Proposed amendments on seven key areas are as follows:
- Those who prepare financial statements would not have a need to apply IFRS 17 for credit cards and loans that come within the boundary of insurance contracts.
- Insurers must allocate acquisition cash flows that directly associate to future contract renewals.
- Proposal to revise the transition requirements for acquired claims liabilities by an entity in a combined business or portfolio transfer.
- Scope for amendment in profit identification pattern for insurance contracts in order to display the provision of insurance coverage or any investment service.
- Amendment in accounting for proportional reinsurance contracts that are onerous on initial recognition.
- Mitigation of financial risk that is applicable to directly participating contracts. This will enable insurers to use it when reinsurance contracts are held.
- Presentation of insurance contracts in the statement of financial position at the portfolio level.
Explaining Two Major Amendments
Out of the seven amendments discussed in brief, the following are the two major amendments that would help insurers to explain the process/ requirements more easily to the investors.
1. Paying Commission on Short-term Insurance Contract Relating to Expected Renewals
In general, an insurer pays commission to an agent for selling contracts. Insurers that sell short-term insurance contracts, for instance, annual motor insurance may pay a commission greater than the annual premium to be received from the customer. The insurer looks to recover the cost and make profits through the renewal of contracts (once or several times).
As per the current implementation of IFRS 17, certain commissions on new insurance contracts are fully allocated to the measurement of those contracts without anticipating renewals. This in some cases results in a loss.
Hence, the proposed amendment would enable insurers to allocate only a part of the commission to anticipated renewals. This will make it easier for insurers to explain to investors the reason behind paying commission greater than the premiums.
2. Recognition of Profit on Long-term Insurance Contracts
Some insurers provide insurance coverage and investment services as a single package to the customers. As per the application of current IFRS 17, profit can be identified during the insurance coverage period showing the pattern of insurance coverage. Additional services like investment service are not included when the period and the patterns are decided (investment-related service contract being an exclusion).
Therefore, the new revisions would require insurers to identify profit considering the pattern of both insurance coverage and investment service. This also includes some deferred annuities when stipulated measures are satisfied representing the existence of an investment service.
The issued Exposure Draft for IFRS 17 was open for comments until 25 September 2019. This will impact the Board’s decision to proceed with the proposed amendments to IFRS 17. IASB plans to announce the amendments if any to IFRS 17 in mid-2020.
Previously, IFRS 17 amendments were planned to come into effect by 2021. But now, the board has put forth an additional proposal to postpone the introduction to 1 January 2022. This will allow insurers to have an additional year to prepare for the implementation of IFRS 17.