Three and a half years sounds like a long lead-in time for a new accounting standard, but a key message emerging from the joint Financial Reporting Faculty and Financial Services Faculty webinar on IFRS 17 Insurance Contracts is that companies are likely to need to make full use of the time available to ensure they are ready to apply the new standard.
IFRS 17 is not mandatory until accounting periods beginning on or after 1 January 2021, but it will in many cases require a radically different approach to accounting for insurance contracts. The webinar presenters highlighted major changes in the measurement of insurance liabilities and in the presentation of performance. For the first time an insurer’s statement of comprehensive income will show revenue, on a comparable basis to other types of business, and the two main drivers of profit – insurance coverage and investment activity – will be presented separately. A key challenge is going to be to work out the best way of explaining the story that these new-look financial reporting numbers are telling.
The standard does include some simplifications, such as the optional premium allocation approach for short-term contracts. This is more similar to the approach currently applied by UK general insurers and is likely to be an important relief for many general insurers and for non-insurers that have issued insurance contracts as part of their business. Even here, however, there are new features in a number of areas which are going to need detailed attention.
Top implementation issues
Top implementation issues highlighted by the presenters included the level of aggregation of contracts: for example, many companies will not currently be able to identify groups of contracts at the level of detail required by IFRS 17. Working through the standard’s transitional requirements and options should be another area of focus as these could have a big impact on future reported profits.
Implementation is likely to involve significant changes to systems and data requirements, yet the results of a poll conducted during the webinar showed that just over half the companies represented had not yet started work on IFRS 17. Just under half were engaged in impact assessment, but none had started on implementation.
Not just for insurers
Another key message is that IFRS 17 is relevant not just for insurance companies. This is because the standard addresses ‘insurance contracts’ rather than ‘insurance business’, and insurance contracts may be issued by any company, including for example banks, other financial services entities, and even non-financial companies.
Companies will need to start their detailed assessment of how they will be affected by IFRS 17 as soon as possible. To assist, the Financial Reporting Faculty will be developing additional resources in coming months for its members, including a factsheet on the new standard . Also, look out for an article in the next issue of By All Accounts by former IASB Board member Stephen Cooper. In addition, there will be a session on IFRS 17 at the Faculty’s 22 November IFRS Conference while the Financial Services Faculty will be holding an evening debate on the new standard on 15 November.