IFRS Update: New standards for insurance contracts
June 20, 2022
This May, the UK Endorsement Board (UKEB) announced its approval of a new international financial reporting standard (IFRS) for insurance contracts – IFRS 17.
This is the first standard of its kind to apply to all types of insurance contracts, and the first major standard adopted by UKEB since the board was established.
It takes effect from 1 January 2023. Ahead of that date, it’s important for all organisations, in the insurance industry or otherwise, to check whether they’ll be affected.
What is IFRS 17?
IFRS 17 is a new reporting standard that applies to insurance contracts.
Its forerunner, IFRS 4, was introduced in 2004 as a stop-gap measure, permitting organisations to use their own national accounting standards for insurance contracts.
This meant insurers and other companies around the world were using various accounting methods for their contracts – making it difficult to compare different organisations.
The new standard aims to provide better clarity and consistency, ensuring that organisations provide relevant information in their accounts that faithfully represents their insurance contracts.
It largely affects the insurance industry, with UKEB’s analysis suggesting that one-off implementation costs for all UK insurance companies adopting IFRS 17 could reach £1.18 billion.
That said, the IFRS is not industry-specific, and businesses in other sectors could be affected.
Nick Clitheroe, the lead on IFRS 17 for the Government Actuary’s Department, noted that “potentially any significant transfer of risk between two parties could also be in scope.”
“It’s worth organisations looking through existing liabilities and even remote contingent liabilities to consider if these involve a contractual transfer of risk,” he added.
Insurance contracts have a few specific features that need to be considered when accounting for them.
They act as both a financial instrument, setting out the monetary terms the insurance provider and the customer are agreeing to, and a service contract.
Many insurance contracts also generate cashflows that can vary over a long period of time.
In its summary of the new standard, the IFRS said IFRS 17 provides useful information about these features by:
● Combining current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract
● Presenting insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses
● Requiring an entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income.
Other changes to IFRS are due from January 2023, including:
- IAS 1: amendments on the classification of liabilities as current or non-current.
- IAS 1 and IFRS practice statement 2: amendments on disclosure of accounting policies, to help people preparing financial statements to decide which accounting policies to disclose.
- IAS 8: amendments on accounting estimates, to help organisations distinguish between accounting policies and accounting estimates.
- IAS 12: amendments on deferred tax, clarifying how companies can account for deferred tax on transactions like leases and decommissioning obligations.
Contact us for more information on any of these updates.