In May 2017, the International Accounting Standards Board issued IFRS 17 Insurance contracts which establishes the principles for recognition, measurement, presentation and disclosure of insurance contracts within the scope of the standard. IFRS 17 is effective for annual reporting periods commencing on or after 1 January 2023, with restatement of comparatives required for the previous reporting period and so a transition balance sheet is required as at 1 January 2022.
An insurance contract is a contract under which one party (the issuer) accepts ‘significant insurance risk’ from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance contracts that are within the scope of IFRS 17 include insurance and reinsurance contracts which the insurer issues, reinsurance contracts it holds and investment contracts with discretionary participation features the insurer issues (provided it also issues insurance contracts). At present, these contracts are accounted for under IFRS 4 Insurance contracts, which will be replaced by IFRS 17.
Who will be affected by IFRS 17?
IFRS 17 applies to all insurance contracts, regardless of the entity that issues them. This means that the standard applies to all entities that issue insurance contracts, whether they are regulated as insurance entities or not.
The standard will not affect policyholders. Insurance contracts are considered to be executory contracts from the perspective of the policyholder and as such policyholders are not expected to apply IFRS 17.
Could IFRS 17 apply to Corporates (i.e non-insurers)?
The scope of IFRS 17 goes beyond the insurance industry since the standard applies to all insurance contracts, regardless of the entity that issues the contracts. These contracts could be issued by corporates that are not regulated as insurance entities. However, there are scope exemptions which could allow certain contracts that are defined as insurance contracts under IFRS 17 not to be accounted for under IFRS 17.
Corporates that issue fixed fee service contracts in which the level of service depends on an uncertain event may need to assess their contracts for meeting the definition of an insurance contract. Examples of fixed fee service contracts that could potentially be insurance contracts and that could be within the scope of IFRS 17 include vehicle roadside assistance, extended warranties and mobile phone screen repair
Certain other warranties and guarantees may also meet the definition of insurance contract. These contracts are widely issued in industries such as mining, civil, heavy and specialist engineering, manufacturing, transportation and general builders where the issuers are not regulated insurance entities.
While the above contracts may meet the definition of an insurance contract, IFRS 17 allows entities to choose whether to apply IFRS 17 or another accounting standard for the following contracts:
- Fixed fee service contracts that meet the definition of insurance contract may be accounted for under IFRS 15 if all the conditions below are met:
- The entity does not reflect the assessment of risk associated with an individual customer in setting the price of the contract with that customer;
- The contract compensates the customer by providing services, rather than by making cash payments to the customer; and
- The insurance risk transferred by the contract arises primarily from the customer’s use of services rather than from uncertainty over the cost of those services.
- Financial guarantee contracts can be accounted in accordance with either IFRS 9 or IFRS 17 unless the issuer of the contracts previously asserted and accounted for the contracts as insurance contracts.
- Contracts that limit compensation for insured events to the amount otherwise required to settle the policyholder’s obligation created by the contract (example, loans with death waivers) can be accounted for in accordance with either IFRS 9 or IFRS 17.
While exemptions above provide an option for companies to choose an IFRS standard to apply to their contracts, specific exclusions mean that companies will have to apply another IFRS (not IFRS 17) even if a contract meets the definition of an insurance contract. An example of such excluded contracts is warranties provided by a manufacturer, dealer or retailer in connection with sale of its goods or services to a customer. Product warranties issued by another party for goods sold by a manufacturer, dealer or retailer are within the scope of IFRS 17.
What should you consider?
Implementation of IFRS 17 is now on the horizon and you need to revisit existing contracts to determine whether they are in the scope of IFRS 17. For contracts that are in scope of the standard, you will need to consider performing an impact assessment to ascertain the accounting and financial implications of implementing the standard. Timing of this impact assessment will need to factor into account the transition requirements for retrospective application of the standard from 1 January 2022.