How to manage interim reporting under IFRS 17
15 December 2020
July’s amendment to IFRS 17 (B137) has created a policy choice for entities applying IAS 34 to their interim reporting — and each option could result in significantly different reported results. With the help of Moody's and their RiskIntegrityTM for IFRS 17 service, we show the impact this could have on your annual results so you can make the appropriate policy choice.
A deeper look at the issue
Here’s a simplified example of how results can vary depending on the policy choice taken:
- Entity A and B both issue quarterly interim financial statements applying IAS 34. Entity C only issues annual financial statements applying IAS 34.
- Entity A chooses to apply the option given by IFRS 17 (B137) and the treatment of accounting estimates made in prior interim periods will not be revised or adjusted in subsequent interim periods and in the entire annual period.
- Entity B chooses not to apply the option given by IFRS 17 (B137).
- Entity C reports only on an annual basis.
- Each entity has an opening CSM of CU 50 and expects an even release over a 2 year period.
- In Q4, the entities expect an additional CU 30 of claims to be incurred in year 2 and adjust the CSM accordingly.
|Entity||CMS Amortisation in Statement of Financial Results|
|Q1||Q2||Q3||Q4||Year 1||Closing CSM|
|A – applies B137||6,25||6,25||6,25||0,25||19||1|
|B – does not apply B137||6,25||6,25||6,25||-8,75||10||10|
|C – annual reporting||n/a||n/a||n/a||n/a||10||10|
In the fourth quarter, Entity A, applying B137, does not change the recognised amounts of CSM release in prior quarterly interim reporting. The CSM recognised in Q4 is measured from the closing balance in Q3 (CU 50 - CU 18.75 = CU 31.25), adjusts for the change in claim estimates (CU 31.25 - CU 10 = 1.25) and releases it in P&L evenly over the remaining 5 quarters (CU 1.25 / 5 = CU 0.25), leaving a CSM balance of CU 1 to amortised in year 2.
Entity B, meanwhile, does not apply B137 and follows IAS 34, which notes that the frequency of an entity’s interim reporting should not affect the measurement of its annual results (typically referred to as a “year-to-date” principle). Therefore, in the fourth quarter, the CSM release is measured on an annual basis. The entity takes a year-to-date view and adjusts the CSM opening balance by the change in claim estimates (CU 50 - CU 30 - CU 20) and releases it in P&L evenly over two years (CU 20 / 2 = CU 10), leaving a CSM balance of CU 10 to amortise in year 2. This results in a negative insurance revenue of CU 8.75 in the fourth quarter to adjust the CSM release in prior interim financial statements (CU 10 - CU 18.75 = - CU 8.75).
Finally, entity C reflects the change in estimates for year 2 (CU 50 - CU 30 = CU 20) and releases CU 10 ( CU 20 / 2 = CU 10).
Making the right choice
If B137 is not elected, IAS 34 will apply and the financial results for the full year will be consistent with annual reporting. However, as illustrated above, it may also generate odd CSM releases for interim financial reporting — if, for example, cash flow assumptions are updated once, at year end.
On the other hand, electing to apply B137 solves the potential issue of presenting odd interim financial results. However, the full year results will be different from annual reporting had interim reporting not existed. This election may also add additional work to subsidiaries with annual reporting, which need to provide IAS 34 compliant interim results to their parent company with interim reporting.
To avoid having to maintain two books of records to support consolidated and standalone reporting, you will need to ensure your interim reporting by subsidiaries meets the minimum content requirements for interim financial statements in IAS 34. It will be critical to select an IFRS 17 system vendor that can accomodate these different accounting requirements and selections across various entities of an insurance organisation. In cases where maintaining two books cannot be avoided, your IFRS 17 solution should also be able to support it.
Clearly defining your financial reporting business requirements will help you identify the pros and cons of the options you have. You will also need to translate these requirements into technical specifications for your implementation. You may find it helpful to develop illustrative examples of these options, through journal entries, for example. This will enable you to deepen your understanding and make educated decisions.
While navigating these multiple options will be challenging, solutions like Moody’s RiskIntegrityTM for IFRS 17 can help you source all your reporting from one single ledger, providing the flexibility you need to meet multiple reporting requirements in parallel via your accounting policy choices.