What is IFRS 17?
The IFRS (International Financial Reporting Standards) is a collection of international accounting standards that make it possible to compare the financial performance and position of companies worldwide. This makes it possible to clearly compare companies‘ financial statements across national boundaries, which is particularly important for companies that have shares outstanding on the public stock market. IFRS standards are mandatory in more than 140 countries and many continents, including the European Union, India, Australia, Russia, South Africa, Singapore and Turkey. IFRS 17 are the latest standards, which will replace the former standards IFRS 4 from 1 January 2023.
What are the core values of IFRS 17 and how can you benefit from it?
IFRS 17 has been in development for more than 20 years and will completely overhaul the way insurance contracts are accounted for. For example, this new standard applies a present value approach to measuring insurance contracts, allowing for the recognition of gains when insurers provide certain services and are exempted from risk. To this end, gains or losses arising from underwriting activities are reported separately from financing activities, and the role of items such as the number of contracts issued or cash receipts and payments must be explained in detail. According to the model of IFRS 17, liabilities arising from insurance contracts entered into will be calculated as the present value of future cash flows, with an included provision for risk. Also, the discount rate will reflect current interest rates. If the present value of future cash flows would produce a profit at the time a contract is issued, then according to the IFRS 17 model a contractual service margin is also required to compensate for this profit on the first day.
IFRS 17 also sets out the core values for recognising, measuring, presenting and disclosing issued insurance contracts, retained reinsurance contracts and investment contracts with discretionary participation features that an insurer issues. Summarised, these are the defined core values:
- Insurance and reinsurance contracts that the insurer issues
- Reinsurance contracts it holds
- Discretionary participation feature (DPF) investment contracts that the insurer issues, provided it also issues insurance contracts
In addition, IFRS 17 contains adjustments for certain specific contracts. For example, short-term insurance contracts will be allowed to use a simplified model of unearned premium liability until an insurance claim is made. For insurance contracts in which cash flows are linked to underlying items, the liability value will also have to reflect this link.
Benefits of IFRS
Hans Hoogervorst, chairman of the IASB (International Accounting Standards Board), sees the use of the current discount rate as one of the benefits of the new IFRS 17 standards. Using this discount rate greatly increases the possibility of comparing insurance companies with other insurers. This also applies to a comparison with other parts of the financial sector, such as banks and asset managers. Other benefits Hoogervorst sees in the new IFRS 17 standards is a higher consistency of accounting for insurance contracts between companies. Also, the new IFRS 17 standard allows for a more theoretically valid measurement of revenue and profit. Got to annualreporting for more info.
