What is IFRS 17 for dummies?
IFRS 17 is the newest IFRS standard for insurance contracts and replaces IFRS 4 on January 1st 2022. It states which insurance contracts items should by on the balance and the profit and loss account of an insurance company, how to measure these items and how to present and disclose this information.
The aim of IFRS 17 is to standardise insurance accounting globally to improve comparability and increase transparency, and to provide users of accounts with the information they need to meaningfully understand the insurer's financial position, performance and risk exposure.
IFRS 17 requires a company to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts. This requirement will provide transparent reporting about a company's financial position and risk.
(iii) the liability for remaining coverage is the entity's obligation to pay claims for future periods of disability both for policyholders that are already disabled and for policyholders yet to become disabled.
With IFRS 17's anticipated mandatory effective date of 1 January 2023 moving ever closer, all types of businesses, not just registered insurance businesses, need to start evaluating the impact of the Standard now.
The key difference between IFRS 17 and IFRS 4 is the consistency of application of accounting treatments to areas such as revenue recognition and liability valuation. Under IFRS 4, entities were free to derive their own interpretations of revenue recognition and calculation of reserves.
- Revenue Recognition Principle. When you are recording information about your business, you need to consider the revenue recognition principle. ...
- Cost Principle. ...
- Matching Principle. ...
- Full Disclosure Principle. ...
- Objectivity Principle.
IFRS 17 Insurance Contracts is a complete overhaul of accounting for insurance contracts, with new requirements for data and processes that impact teams across the organization, including actuarial, accounting, and IT.
IFRS 17 defines insurance contracts as contracts under which one party (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
IFRS 17 replaces IFRS 4, which currently permits a wide variety of practices. IFRS 17 will fundamentally change the accounting by all entities that issue insurance contracts and investment contracts with discretionary participation features.
How are contracts grouped under IFRS 17?
IFRS 17 requires a portfolio of contracts to be divided into annual 'cohorts' or 'time buckets'. As a result, group may not include contracts which are issued more than one year apart. A cohort can be based on an issuing period, which can be less than a year.
IFRS 17 adoption progresses around the world
China, the second largest insurance market in the world, has decided to adopt IFRS 17 over a three year transition period. Saudi Arabia has adopted the IFRS 17 amendments issued in June 2020 and India is consulting on the adoption of them.
The objective of IFRS 17 is to ensure that an entity provides relevant information that faithfully represents those contracts. This information gives a basis for users of financial statements to assess the effect that insurance contracts have on the entity's financial position, financial performance and cash flows.
As described in paragraph B65 of IFRS 17, cash flows within the boundary of an insurance contract are those that relate directly to the fulfilment of the contract. Cash flows within the boundary include certain transaction-based taxes, such as premium taxes, value added taxes, and goods and services taxes.
IFRS 17:37] Contractual Service Margin. The CSM represents the unearned profit of the group of insurance contracts that the entity will. recognise as it provides services in the future.
