How IFRS 17 changes the presentation of financial position and performance for non-life insurers and reinsurers.
IFRS 17 is an accounting standard that establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts.
It sets out the reporting requirements for insurance contracts in the statement of financial performance and statement of financial position. It requires amounts relating to insurance contracts issued and reinsurance contracts held to be reported separately.
This article looks specifically at the presentation of the statement of financial performance (income statement) and statement of financial position (balance sheet). It compares presentation under IFRS 4 with presentation under IFRS 17 and highlights the changes introduced by the newer standard. These principles apply to both insurers and reinsurers, collectively referred to as insurers in this article.
IFRS 4 vs IFRS 17: Statement of financial position
At each reporting date, insurers will present assets and liabilities in the statement of financial position separately for insurance contracts issued and reinsurance contracts held.
| IFRS 4 statement of financial position | IFRS 17 statement of financial position |
|---|---|
| Financial assets | Financial assets |
| Deferred acquisition costs | Reinsurance assets |
| Premiums receivable | Other assets |
| Reinsurance assets | Total assets |
| Other assets | Insurance liabilities |
| Total assets | Other liabilities |
| Insurance liabilities | Equity |
| Unearned premium | Total liabilities and equity |
| Other liabilities | |
| Equity | |
| Total liabilities and equity |
IFRS 17 nets all future cash flows within the contract boundary of insurance contracts into a single carrying amount for each group of contracts. This differs from IFRS 4, under which premiums receivable, deferred acquisition costs, estimated insurance liabilities, unearned premium and other intangible assets are presented separately. Insurers may still present this information as supplementary information where it helps users understand the financial statements.
Deferred acquisition costs
Unlike IFRS 4, deferred acquisition costs will not be presented as a separate asset under IFRS 17. Insurance acquisition cash flows are included in fulfilment cash flows and reflected in the overall insurance contract liability.
When the Premium Allocation Approach (PAA) is used for a group of contracts with a coverage period of one year or less, an insurer may elect to recognise insurance acquisition cash flows as expenses when incurred. Where acquisition cash flows are recognised as assets or liabilities, they are derecognised when the related group of insurance contracts is recognised.
Liability for remaining coverage
The liability for remaining coverage (LRC) is broadly equivalent to the current unearned premium reserve. It is included in the overall insurance liability in the statement of financial position and separately identified in the notes, supported by a detailed roll-forward.
Under the General Measurement Model (GMM), stakeholders can analyse the LRC by component—including the present value of cash flows, risk adjustment and contractual service margin. Under the PAA, showing these components is not a strict requirement.
Liability for incurred claims
The liability for incurred claims (LIC) is broadly equivalent to claim or loss reserves, including IBNR, outstanding claims and IBNER. It is included in the overall insurance liability and separately identified in the notes with a detailed roll-forward.
In principle, the liability equals probability-weighted expected cash outflows plus an explicit adjustment for risk, allowing for the time value of money. The components are reported separately in the notes under both the PAA and GMM.
IFRS 4 vs IFRS 17: Income statement
Under IFRS 17, insurers disaggregate amounts recognised in the statement of financial performance into the insurance service result and insurance finance income or expenses. Income and expenses from insurance contracts issued are also reported separately from those arising from reinsurance contracts held.
| IFRS 4 income statement | IFRS 17 income statement |
|---|---|
| Gross premium | Insurance revenue |
| Premium ceded to reinsurers | Incurred claims |
| Investment income | Insurance contract expenses |
| Acquisition costs | Result on reinsurance |
| Total income | Insurance service expenses |
| Gross claims and benefits | Insurance service result |
| Claims ceded to reinsurers | Investment income |
| Change in insurance contract liability | Insurance finance expenses |
| Expenses | Net financial result |
| Acquisition costs | Profit or loss before tax |
| Total expenses | Other comprehensive income |
| Profit or loss before tax | Total comprehensive income |
| Other comprehensive income | |
| Total comprehensive income |
Under IFRS 17, premiums will no longer appear as a line item in the income statement, but will be disclosed in the notes and commentary. Revenue and expenses are recognised as service is provided or incurred, rather than when cash is received or paid.
The statement of financial performance has two principal components: the insurance service result and the net financial result.
Insurance service result
The insurance service result consists of insurance revenue less insurance service expenses.
Insurance revenue for a group of contracts represents the consideration for services provided, adjusted for financing effects and excluding investment components. Revenue is recognised as insurance service is provided, rather than when premiums become due.
Insurance revenue may include:
- amounts related to insurance acquisition cash flows;
- allocation of the contractual service margin to profit or loss when the PAA is not used;
- release of the risk adjustment for non-financial risk, excluding amounts allocated to the loss component of the liability for remaining coverage; and
- other amounts related to insurance services provided.
The separate components of insurance revenue do not need to appear on the face of the primary financial statements. They are disclosed in the notes to improve users’ understanding of the financial statements.
The perceived size of some organisations may change under the new revenue metric, particularly where stakeholders previously placed significant emphasis on written or received premium.
Insurance service expenses
Insurance service expenses are recognised when incurred rather than when paid. They may include:
- incurred claims, excluding repayments of investment components;
- amortisation of insurance acquisition cash flows;
- changes in fulfilment cash flows relating to past service, including changes in the liability for incurred claims;
- changes in fulfilment cash flows relating to future service that do not adjust the contractual service margin, including losses on onerous groups and reversals of those losses; and
- other incurred insurance service expenses.
Results from reinsurance contracts held are shown separately. Insurance service expenses should be disaggregated where relevant to understanding the insurer’s financial performance.
Net financial result
The net financial result consists of insurance finance income less insurance finance expenses.
It reflects changes in the carrying amount of groups of insurance contracts arising from the accretion of interest, changes in discount rates and other financial risks.
Entities make an accounting policy choice between presenting insurance finance income or expenses wholly in profit or loss, or disaggregating them between profit or loss and other comprehensive income. This allows insurers to reflect how they manage financial risk and the effects of changes in the risk adjustment.
Other comprehensive income contains insurance finance income and expenses that are not presented in profit or loss.
IFRS 17 should generally increase the comparability of accounts. However, the choice between presenting finance effects wholly in profit or loss and disaggregating them through other comprehensive income may reduce comparability between insurers.
Conclusion
IFRS 17 establishes the minimum information presented in the statement of financial position and statement of financial performance. Insurers may provide further information or expand particular line items where this makes the relationship between reconciliations and the financial statements easier to understand. Disclosures supplement the primary statements and explain amounts recognised on their face.
The measurement and presentation requirements of IFRS 17 may change an entity’s reported financial position and performance. As with any major new accounting standard, insurers may initially present old and new formats during a transition period. Preparers of financial statements are best placed to explain the resulting changes to their stakeholders.
In general, IFRS 17 is expected to increase comparability between entities, helping investors and other stakeholders make better-informed decisions.
Disclaimer
This content is for general information purposes only and should not be used as a substitute for consultation with professional advisers.
This article represents the authors’ views and their understanding of the cited sources.
Feedback is welcome at actuary@claxonactuaries.com.
References
- EY. (May 2018). Applying IFRS 17: A Closer Look at the New Insurance Contracts Standard.
- International Accounting Standards Board. (May 2017). IFRS 17 Insurance Contracts.
- International Accounting Standards Board. (May 2017). IFRS 17 Insurance Contracts—Effects Analysis.
- International Accounting Standards Board. (May 2017). IFRS 17 Insurance Contracts—Illustrative Examples.
- Wozniak, W. and Hupert, A. (March 2019). Introduction to IFRS 17—Three Blocks.