IFRS 17 challenges and opportunities (2024)

FAQs

What makes IFRS 17 transition unique and challenging? ›

What's the issue? Under IFRS 17, liabilities relating to claims settlement are treated differently depending on whether the insurance contracts were issued by an insurer or acquired in a business combination or portfolio transfer, as shown below.

IFRS 17 creates a universal language for insurance contract accounting, facilitating easier comparison between insurers across different markets. This comparability is crucial for investors and analysts who assess and benchmark the performance of insurance companies globally.

They found that the basic problem to be faced by adopting IAS (IFRS) is the lack of knowledge of international standards on the part of the clients that retain the services of the large accounting firms and concluded that, low level of IAS (now IFRS) knowledge makes it more difficult for any accounting firm to provide ...

The move to IFRS 17 led to significant changes in the value of insurance liabilities given the use of different valuation approaches, the shift from implicit prudency to explicit risk adjustment and the introduction of a contractual service margin (CSM) in IFRS 17.

Complexity: IFRS 17 is a complex standard that requires a thorough understanding of insurance contracts and the underlying financial and actuarial concepts.

Insurance contract liabilities will be measured in a different way to existing accounting standards. Premiums will no longer be presented on the face of the P&L. IFRS 17 also introduces the Contractual Service Margin (CSM), representing unearned profits expected to amortise into income as services are provided.

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. Mainly to make the financial statement easier to compare across insurance companies and among industries.

Different Nations' Capital Markets and Norms are Not the Same. IFRS is designed to be a global standard that applies uniformly across jurisdictions. While this uniformity is an advantage in promoting comparability, it can also be a drawback in certain cases.

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted as long as IFRS 9 is also applied. Insurance contracts combine features of both a financial instrument and a service contract.

Data challenges

IFRS 17 introduced a significant amount of new data which companies collect to produce their financial and performance reporting. And the data challenges have been varied. Some policy admin systems have found data gaps alongside granularity and quality issues.

What is the status of IFRS 17 implementation? ›

IFRS 17 – Insurance contracts entered into force on 1 January 2023. The new standard aims to increase transparency and to reduce differences in the accounting for insurance contracts and it replaces IFRS 4 (interim standard).

One major difference between GAAP and IFRS is their methodology, with GAAP being rules-based and the latter being principles-based. This difference has posed a challenge in areas such as consolidation, the income statement, inventory, the earnings-per-share calculation, and development costs.

IFRS 17 encourages insurers to adopt a more strategic approach to business decision-making. With a focus on the economic substance of insurance contracts, insurers gain insights into the profitability and risk profiles of different products.

❹ What changes? 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.

The granularity of the data needed may also pose a problem—the calculation of CSM will be needed at the unit-of-account level (i.e., by portfolio, profitability and annual cohort), which may not be easily available from historical information, as this level of granularity would not typically have been needed prior to ...

FUNDING IS SIGNIFICANT HURDLE

The biggest obstacle to IFRS adoption for U.S. public companies may be the funding of the IASB.

In summary, the default transition approach is retrospective application but IFRS 17 provides for two alternative approaches in cases where it is impracticable1 to apply a fully retrospective approach.