IFRS 17 - Are you ready?

IFRS 17, the latest standard issued by the International Accounting Standards Board (IASB), establishes principles for the recognition, measurement, presentation and disclosures of insurance and reinsurance contracts issued and held by entities. The standard, similar to IFRS 4, focuses on types of contracts rather than types of entities and hence, generally applies to all entities that write insurance contracts. The standard is to be effective 1 Jan, 2023. Considering that we still have two years to comply,

Why discuss this now? The reason lies in the complexity of the standard itself, not only with respect to its application, but also in relation to its interpretation.

 IFRS 17 will supersede IFRS 4, which is the current financial reporting standard under which insurance companies prepare their financial statements. This article discusses how IFRS 17 differs from IFRS 4, and provides an overview of the standard and its application.

IFRS 17 applies to the following contracts:

• Insurance contracts issued by an entity,
• Reinsurance contracts issued by an entity,
• Part of the insurance contracts that a company has ceded (sold/transferred risk) to the reinsurance company (reinsurance contracts held by an entity),
• Investment contracts with discretionary participation features, provided the entity also issues insurance contracts

IFRS 17 vs. IFRS 4

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. For example, it was at the discretion of the companies to include risk adjustment in the liabilities under IFRS 4, whereas it is now mandatory under IFRS 17. The table below provides more detail around the fundamental differences between IFRS 4 and IFRS 17.

IFRS 17 brings with it a lot of challenges and opportunities for insurance companies. Some of these key challenges, and how to manage them, include:

High operational costs : Entities need to acknowledge that the program and cost will span several years and should plan budgets accordingly.

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A fragmented and complex IT infrastructure legacy :Involvement of IT vendors and consultants with proven experience at early stages.

Human resource capabilities :Regular training and coaching with practical examples and scenarios. Hiring of professional staff with expertise in insurance.

Readiness of Board of Directors (BoD) :Training sessions for BoD, Executive Committees, Audit Committees with respect to IFRS 17.

Ownership to implement change :Establishment of steering committees with specific assigned tasks.

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