At its March 2020 meeting, the International Accounting Standards Board deferred the effective date of IFRS 17 Insurance Contracts for a year to 1 January 2023, with early application permitted.The temporary exemption to IFRS 9 Financial Instruments, granted to insurers who meet specified criteria, was also extended to 1 January 2023.
IFRS 17 supersedes IFRS 4 Insurance Contracts which was only ever intended to be a temporary standard. IFRS 4 allowed entities to use a wide variety of accounting practices for insurance contracts, reflecting national accounting requirements and variations of those requirements. This lack of harmonization made it difficult to understand and compare insurers’ results. The need for a common global insurance accounting standard was universally agreed; however, a consensus as to what it should contain was harder to reach.
Now finalised IFRS 17 applies a current value approach to measuring insurance contracts and recognises profit as insurers provide services to policyholders. The profit or loss earned from underwriting activities is reported separately from financing activities. Detailed note disclosures are required to explain how new business issued, experience in the year, cash receipts and payments, and changes in assumptions are affected the performance and the carrying amount of insurance contracts.
Some previous accounting practices under IFRS 4 did not adequately reflect the true underlying financial position or the financial performances of these insurance contracts. After more than 20 years in development, the new standard is intended to increase the transparency of insurers’ financial positions and performance and will make their financial statements more comparable with both other insurers. Users of financial statements will receive more and different information about a firm’s insurance contracts under IFRS 17 than in the past.
The impact on the insurance firm and the degree of change compared to existing practice will vary based on existing accounting policies and the types of business written. However, the quantum of change should not be underestimated. Preparations for FRS 17 in the areas of finance, actuarial, I.T. and operations should be well underway
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While preparations are underway it is worth taking a step back and reflecting on the findings published a number of years ago following the Central Bank’s IFRS 17 questionnaire to ensure that the governance perspectives are not overlooked:
Insurance entities should ensure that appropriate planning arrangements and governance structures are in in place to mitigate the risks associated with the IFRS 17 implementation not least as the Central Bank of Ireland has advised that it will monitor the operational risk exposure associated with the implementation of IFRS 17 through its on-going supervisory activities.
