Is IFRS 17 stable at last?

On 25 June 2020, the International Accounting Standards Board (IASB) issued amendments to IFRS 17 ‘insurance contracts’, three years after IFRS 17 was originally issued and 23 years after the insurance contracts project started. The standard comes into effect for annual periods from 1 January 2023, with earlier application permitted.

IFRS 17 replaces IFRS 4 and introduces consistent accounting requirements for insurance contracts. The IASB intends to align accounting for insurance contracts with other, more general, accounting standards. However, some insurers have lived in accounting silos for years, meaning many insurance accounting policies would be unrecognisable to those outside the industry. IFRS 17 asks insurers to view their financial statements in a fundamentally different way.

These amendments were developed to simplify some of the requirements and make it easier to implement IFRS 17, particularly in those areas that may present significant challenges. Our ‘In brief’ publication looks at the amendments in more detail.

Summary of amendments to IFRS 17:

The new amendments provide a more practical basis for implementation, but do not address all of the industry’s concerns and will inevitably disappoint some. Some of the changes - such as deferring acquisition costs and extending the implementation period - while welcome to many insurers, will increase costs for others.

Some areas will cause concerns, particularly those in which IFRS 17 is so different from insurance accounting today. These include annual cohorts and insurance contracts acquired during their settlement period. Although we’ve seen amendments for reinsurance contracts held, the approach of treating such contracts as separate from the underlying insurance contracts is different to existing practices. In addition, insurers used to avoiding reported mismatches between asset and liability performance using shadow accounting are concerned that restrictions such as the prohibition on retrospective application of the risk mitigation option will not reflect their economic position.

The IASB clearly thinks its part in the standard-setting process is complete, although it remains open to supporting implementation through bodies such as the IFRS Interpretations Committee. However, there may still be hurdles - mostly political - in the implementation of IFRS 17 around the world.

Certain jurisdictions implement IFRS Standards as issued by the IASB directly and many jurisdictions have already endorsed IFRS 17. However, Europe remains a notable exception. One of the biggest jurisdictions that applies IFRS Standards, it has some of the largest insurers in the world and one of the most politicised endorsement processes. This process is likely to continue over the next 12 months, with a rehash of many of the same issues that have been discussed since 1997. Companies all over the world are waiting to see what happens in the European endorsement process. Until it has concluded, the ongoing saga of IFRS 17’s implementation will help neither long-suffering investors nor companies who need to implement the new standard.

I hope that the issuance of the amendments to the standard can signal the start of some much-needed stability. Insurers must now be allowed to focus on progressing implementation projects and understanding how best to tell their IFRS 17 story to stakeholders.

Accounting change is always hard and implementing new accounting requirements often involves significant operational costs. We’ve seen this with the recent standards such as IFRS 9 for financial instruments in the banking sector and IFRS 15 revenue recognition in many different sectors. The IASB has finished this long-running saga and we were never going to get an accounting standard that was universally loved by all! Many insurers just want to finalise IFRS 17 project and welcome the certainty of the 2023 date, even if there will be a lot to do before then.

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