Invitation to comment on IFRS 17 Insurance Contracts

The International Accounting Standards Board (IASB) has issued  IFRS 17 Insurance Contracts which sets out the requirements that a company must apply in reporting information about insurance contracts. IFRS 17 will supersede IFRS 4 Insurance Contracts, effective from January 01, 2022.

The Accounting Standards Board (ASB) has started the due process for recommending the adoption of IFRS 17. ASB requests for your comments on IFRS 17 adoption in Pakistan as stakeholder feedback is a critical input to the ASB’s due process for recommending the adoption of an IFRS.

Why IASB issued IFRS 17

 IFRS 17 represents the culmination of a twenty-year project by the IASB on the accounting for insurance contracts. The new standard replaces IFRS 4 which being an interim insurance standard did not prescribe measurement of insurance contracts. Instead IFRS 4 allowed companies to use local accounting requirements for the measurement of their insurance contracts issued. Resultantly, insurers currently use a wide range of insurance accounting practices for reporting on a key aspect of their business, making it difficult for investors and analysts to understand and compare insurers’ results. In consideration of this IASB has developed and issued the new insurance standard i.e. IFRS 17 with the expectation that it will result in a significant increase in alignment of insurance accounting and global comparability and enhanced quality of financial information.

Snapshot of IFRS 17

 A company is allowed to apply the requirements of IFRS 17 to a group of contracts (portfolio basis) rather than on a contract-by-contract basis.

All insurance contracts are initially measured as the total of:

  1. the fulfilment cash flows; and
  2. the contractual service margin, unless the contracts are onerous.

It requires a company that issues insurance contracts to report them on the balance sheet as the total of:

  1. the fulfilment cash flows—the current estimates of amounts that the company expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those amounts; and
  2. the contractual service margin—the expected profit for providing insurance coverage.

The expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided. IFRS 17 requires the company to distinguish between groups of contracts expected to be profit making and groups of contracts expected to be loss making. Any expected losses arising from loss-making, or onerous, contracts are accounted for in profit or loss as soon as the company determines that losses are expected.

The standard requires measurement of insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts.

 IFRS 17 also requires disclosure of information at a level of granularity that would help users assess the effects the contracts would have on the financial position, financial performance and cash flows.

IFRS 17 is effective for annual reporting periods beginning on or after January 1, 2022.  The transition date is the beginning of the annual reporting period immediately preceding the date of initial application. The standard prescribes a full retrospective approach. However, companies as an expedient use also use Modified retrospective approach or Fair value approach, in case it is impracticable to use a full retrospective approach.

Companies impacted

IFRS 17 essentially applies to the same population of contracts that IFRS 4 applies to. Like IFRS 4, IFRS 17 applies to all companies that issue insurance contracts (not only to insurance companies). In Pakistan only insurance companies can issue insurance contracts therefore the new standard would impact the insurance industry.

 Publications and Guidance material:

  • The full text of the IFRS 17 can be downloaded from the IASB website at:

https://www.ifrs.org/issued-standards/list-of-standards/ifrs-17-insurance-contracts/

  • Further, the Institute’s Technical Services Department has compiled a list of useful international guidance material to help you understand and apply IFRS 17. Please visit the page:

http://www.icap.net.pk/ifrs-17-insurance-contracts-international-guidance-material

You are requested to send your views on IFRS 17 adoption to the Technical Services Department at   dtscomments@icap.org.pk  latest by August 2, 2019.

Circular 4 Invitation to comment on IFRS 17 Insurance Contracts