The FRC’s thematic review of IFRS 17 disclosures

The key takeaways and details of the findings from the FRC.

4 min read

Introduction

The Financial Reporting Council (FRC) has recently published its thematic review of the IFRS 17 disclosures provided by UK insurers’ in the interim financial statements prepared under IAS 34. Although the FRC’s thematic review focuses on UK-based companies, it is nice to see that FRC’s findings are aligned to the observations in our publication which was released in September this year.

Overall, the FRC is pleased to see that insurers (and non-insurers!) are on the right track with regards to the disclosures provided in their interim financial statements whilst noting areas for improvement. The FRC emphasised their expectations for insurers to continue to develop and improve their financial reporting ahead of a follow-on thematic review which will be undertaken on the first annual financial statements implementing IFRS 17.

This article summaries the key matters from the FRC’s review and our thoughts on the next steps for insurers.

Allan Jones

Director, Accounting Advisory Services

KPMG in the UK

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Danny Clark

Partner

KPMG in the UK

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Key Takeaways

In this thematic review, the following themes emerged across companies:

Tailored disclosures: The importance of company-specific disclosures has been highlighted. Without drowning in excessive detail, companies are expected to provide qualitative and quantitative disclosures that enable the users to understand the nuances of the measurement and presentation of insurance contracts under IFRS 17. In particular companies need to consider the usefulness of the information when considering the appropriate level of aggregation or disaggregation in the disclosures.
Comprehensive transition disclosures: The FRC underlines the importance of providing both qualitative and quantitative information about the impact of transition to IFRS 17, including details of the underlying methodology used to measure the insurance contracts and disclosure of CSM and revenue reconciliations by transition method.
Granularity in accounting policies: The frequent use of boilerplate language in policies has been identified and has been discouraged. The need for not only sufficiently detailed but also clearer and consistent explanations of policy choices, significant judgements and estimates has been emphasised, especially in areas where IFRS 17 is not prescriptive.
Transparency of APMs: Following the adoption of IFRS 17, insurers are expected to provide high quality disclosures for APMs, i.e., detailed explanations including how APMs retained have been impacted from IFRS 17 and reconcile them with the most directly comparable line item in the financial statements while avoiding unnecessary emphasis.
Tax implications: The impacts of IFRS 17 on current and deferred taxes need to be assessed carefully. Detailed explanations of the key drivers of change need to be disclosed.

Details of the Findings

The FRC’s report delves into the following topics by providing examples of both areas of improvement and examples of good practice. A summary of the main findings by topic has been outlined below:

Whilst companies provide disclosures on what transition approaches have been used, there is diversity in practices across companies in the level of detail provided. Notably, most companies applied full retrospective approach, with some adopting an element of the modified retrospective and fair value approaches. The better disclosures stood out by providing both qualitative and quantitative insights into the impact of measurement and presentational changes, explaining the rationale behind the selected approaches and detailing the methods used to calculate transition balances. However, the FRC highlighted in particular, that information on the key judgements, assumptions and valuation inputs used to determine the fair value was not provided in a majority of the reports where the fair valuation approach was adopted.

The FRC appreciates companies for providing clear and detailed information on accounting policies, yet observed a tendency to duplicate the text from the standard. It appears that there is still room for improvement and, the FRC’s expectation is to tailor the narratives for the major business lines rather than using boiler-plate language. Better disclosures included company specific, granular and where possible quantitative information e.g., meaningful sensitivites about the assumptions underlying significant estimates, illiquidity premiums used for discount rates by product and currency.

The majority of the companies clearly disclosed the measurement models applied, with detailed explanations for the underlying rationale regarding how the eligibility assessments have been made where the General Measurement Model is not applied.

The thematic review also covered the components of the measurement, e.g., estimates of future cash flows, discounting, risk adjustment and contractual service margin (CSM). Whilst the FRC was pleased with the disclosures related to the future cash flows and the CSM, insurers will be expected to disclose more information about the determination of discount rates and risk adjustment in the annual financial statements. Areas of improvement include the detailed explanations of cash flows included withing the boundary, selected risk-free rates, methods adopted to calculate the discount curves especially the illiquidity premium, comparison of risks considered in the risk adjustment calculation against Solvency II, consideration of diversification benefits and allocation methodology.

The disclosure of APMs continues to vary across insurers. Following the adoption of IFRS 17, the FRC called for high quality disclosures by drawing attention to the expectations set out in their previous thematic reviews on APMs. Overall, the FRC expects insurers to provide not only clear explanations on changes in the use of APMs, description and relevance of new APMs but also remembering that APMs should not be presented with undue prominence and should include a reconciliation to the most directly reconcilable line items presented in the financial statements. Whilst it’s not required by IFRS 17, the FRC adduced the reconciliation between the previously reported APMs and the revised figure under IFRS 17 as an exemplarary disclosure.

Other areas where the FRC raised issues included level of aggregation in the disclosures, tax implications, scope assessments carried out by non-insurers, and transition to IFRS 9. It appears that most companies did not explain the impacts on deferred tax and current tax as the primary focus was on producing numbers. Insurers will need to think about how to disclose the tax impact of transition to IFRS 17 in their annual financial statements. Also, insurers need to be careful about lack of disaggregation in the disclosures whilst the FRC recognises that the disclosure requirements for interim accounts are not exhaustive compared to IFRS 17.

Navigating the road ahead

The journey for an enhanced financial reporting under IFRS 17 continues. The FRC has set out its expectations for future reporting including:

Providing qualitative and quantitative disclosures that are decision useful, proportionate and company specific.
Providing clear consistent explanations of accounting policy choices, key judgements, and assumptions particularly where IFRS 17 is not prescriptive.
Providing information about the methodologies and assumptions to determine the amounts at risk where estimation uncertainty exists, with meaningful sensitivities and/or ranges of outcomes.
Providing disaggregated information that is useful to users to understand the financial effects of material portfolios of contracts.
Explaining the impact of transition, the measurement methodologies, and reconciliations of CSM and Revenue by transition method.
Ensuring APMs, including the changing use of APMs, are adequately explained and reconciled to the most appropriate directly reconcilable line item in the financial statements.

The FRC intends to follow up this thematic review with a similar review of the first annual financial statements under IFRS 17 and is encouraging insurers to continue to develop and improve their financial reporting.

In advance of the year-end reporting cycle, it would be a good starting point for insurers to understand the key issues around the financial reporting from this review and, it offers a roadmap for improvement areas.

Now, it's time to go through the disclosures before annual reporting!

How can we help?

If you need a support on your journey to improved IFRS 17 financial reporting or would like to discuss any of the findings further, please get in touch.