IFRS 17

Background

Since issuing IFRS 17 in May 2017, the IASB has undertaken a comprehensive programme of stakeholder engagement, including holding four meetings of the IFRS 17 Transition Resource Group (TRG) to identify and understand concerns and implementation challenges, including those related to the balance of costs and benefits from applying IFRS 17.

After several deliberations, the IASB published Exposure Draft ED/2019/4 Amendments to IFRS 17 (the ‘ED’) for public comment in June 2019. The ED proposed several amendments to IFRS 17 that in the IASB’s view would improve the standard but without changing its fundamental principles, without loss of user information and with limited disruption to the implementation work already underway. After the comment period ended, the IASB analysed the comment letters, reconsidered areas for which feedback in the comment letters was constructive and finalised the improvements to IFRS 17.

Finally, the IASB amended the effective date for IFRS 17 and the fixed expiry date for the temporary exemption in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments. With these amendments entities would be required to apply IFRS 9 for annual periods beginning on or after 1 January 2023 at the same time as IFRS 17 is mandatorily effective.

Insurance acquisition cash flows

The benefit an insurer derives from insurance acquisition cash flows is captured in a more comprehensive manner in the amended IFRS 17. In addition to a requirement to allocate on a systematic and rational basis to groups of existing contracts and to future groups, an insurer will also allocate acquisition costs directly attributable to a contract if they can be allocated to future groups that include the expected renewals of the existing contracts. When facts and circumstances indicate that this asset may be impaired, an impairment testing is required to be performed at the end of the reporting period to assess its recoverability.

Additional disclosures are required to provide users with useful information relating to the insurance acquisition cash flows asset, including when the asset is expected to be derecognised and included in the measurement of the group of contracts to which they are allocated.

Reinsurance contracts held when underlying contracts are onerous

The amended IFRS 17 has improved the accounting of recoveries that a cedant is required to account for against reinsured losses, even when they arise on the initial measurement of the underlying reinsured contracts.

This accounting requires a cedant to adjust the contractual service margin (CSM) of a group of reinsurance contracts held, and as a result recognise income, when it incurs a loss on initial recognition of an onerous group of underlying insurance contracts, or on addition of onerous contracts to that group. The amount of the reinsurance recovery is based on the percentage of recovery from the reinsurance contracts held.

Additional guidance applicable to specific circumstances when a reinsurance contract only covers the losses of some of the contracts within an onerous group has also been provided. Additional transition provisions have also been provided.

CSM allocation relating to investment services

For direct participating insurance contracts (under the variable fee approach) and for indirect participating insurance contracts (under the general model), the CSM allocation is now based on coverage units determined considering the quantities of benefits and expected period of both insurance coverage and investment services. Although similar, investment services have new tailored definitions if they are part of direct participating contract (investment-related service) or of an indirect participating contract (investment-return service).

Additional disclosures are required to provide users with useful information on this new process such as the specific disclosure of the approach used to assess the relative weighting of the benefits provided by insurance coverage and investment-related services or investment-return services.

Extension of the risk mitigation option

For direct participating contracts, the applicability of the risk mitigation option is extended to permit the use of reinsurance contracts held and non-derivative financial instruments measured at fair value through profit or loss as hedging instruments. Additional transition provisions have also been provided.

Effective date

IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted if IFRS 9 Financial Instruments has also been applied.

Other amendments

Minor amendments have also been made on other areas of IFRS 17, including the scope, presentation requirements, definition of a number of IFRS 17 terms, and clarifications on existing IFRS 17 requirements.