IFRS 17: Transfer Pricing

IFRS 17 Insurance Contracts (“IFRS 17”), as issued by the International Accounting Standards Board, is required to be adopted by insurance companies reporting under IFRS on or after 1st January 2023 and introduces a completely new financial reporting standard for insurance and reinsurance contracts.

The key changes to financial reporting following the adoption of IFRS 17 may be summarised as follows:

• Significantly different and more complex accounting for insurance contracts including on the timing of profit recognition;
• New and expanded disclosure requirements (quantitative and qualitative); and
• Transition resulting in a day one profit impact. 

Many insurers and analysts agree that IFRS 17 insurance contracts is a positive accounting change, helping to align asset and liability measurement models along with clearer presentation and disclosures in the finance statements. While these changes apply across the insurance industry, they are particularly significant for life insurers.¹

As a result of the change that IFRS 17 brings, transfer pricing is affected as the financial accounts used to calculate intercompany prices change. As a result, the impact will be two-fold. First, the accounting and the financial statements of a group and its members, which are a key source of financial data for its intragroup transactions, will change. And second, the financial statements of comparable third parties used as a reference point when assessing the arm’s length basis of those intragroup transactions will also change.

In the case of IFRS 17, the changes may not impact the underlying economics and ultimate outcomes of insurance and reinsurance contracts, but IFRS 17 will impact the disclosure and the timing of recognition in insurers’ financial statements over the life of the contract. The implications of the transition to IFRS 17 for transfer pricing can be summarised as follows:

• Companies will need to address issues relating to the transition to IFRS 17. Transfer pricing rules will apply to intragroup allocations of costs of implementing of IFRS 17. More importantly, transfer pricing analysis, including benchmark studies, will need to cover transitional adjustments and periods that include the years before and after adoption of IFRS 17.
• Companies will need to adapt transfer pricing policies in response to the different disclosures required by IFRS 17. This means that some information used in the past for transfer pricing may no longer be disclosed, for example, insurance-based metrics for allocating service fees such as the gross written premium. In contrast, IFRS 17 will result in new, more granular disclosures that will require consideration, e.g. (re)insurance assumptions and features such as discount rates, expected future profits and confidence levels. This has the potential to give tax authorities greater ability to make comparisons between different taxpayers to challenge pricing. Furthermore, disclosure of the contractual service margin (CSM) makes the value transferred by a (re)insurance transaction more visible to the tax authorities.
•  Companies will need to review and update transfer pricing policies. Financial and cost allocation models have been, and will continue to be, adapted to meet the needs of IFRS 17. The risk to be managed is that such adaptations do not degrade the data flow needed for transfer pricing.
• Companies may adjust business operations in response to IFRS 17. These adjustments may have implications for revisiting the rationale, structuring or pricing of intragroup transactions. For example, it may be that insurers act to address the greater volatility in financial accounts prepared under IFRS 17 through changes to reinsurance treaty terms or forms of hedging arrangements.

The immediate priority for transfer pricing teams will likely remain keeping close to the team responsible for implementing and reporting IFRS 17. This will enable the transfer pricing teams to manage the effects of changes in disclosures, input variables, cost allocation, and other financial systems changes on transfer pricing. This should give comfort that the transition to IFRS 17 is progressing efficiently with transfer pricing implications assessed and accommodated to facilitate early engagement in the event of emerging issues.

The broader priority for transfer pricing teams will be to continue to assess the impact of IFRS 17 and to address the identified sensitivities, including refinement of the transfer documentation required by many countries. As outlined above these sensitivities are potentially wide ranging with early engagement offering the best opportunity for their mitigation.

For further information and guidance on the topic, please contact a member of our team.