Presentation of Financial Accounts under IFRS17: Non-Life Insurers

This article looks at the presentation of accounts under IFRS17, specifically the presentation of Statement of Financial Performance (Income Statement) and Statement of Financial Position (Balance Sheet). It gives a comparison of how the current accounts are presented under IFRS4 and how they will be presented under IFRS17 and gives an insight into the changes being brought about by IFRS17. These principles are applicable to both insurers and reinsurers (“insurers”).

IFRS4 vs IFRS17 Presentation of Statement of Financial Position

Insurers will present assets and liabilities in the statement of financial position separately for insurance contracts issued and reinsurance contracts held at each reporting date.

IFRS17 nets all future cash flows within the contract boundary of insurance contracts to form part of a single carrying amount for each group of contracts. This is different from the treatment under IFRS4 where there is a separate presentation of premiums receivables, deferred acquisition costs, estimated insurance liabilities, unearned premium and other intangible assets. However, under IFRS17, insurers may present this information as supplementary information to offer more understanding of the financial statements.

Deferred Acquisition Costs will not be presented as an asset under IFRS17 unlike under IFRS4. Contract acquisition costs are included in insurance contract fulfilment cash flows and are therefore reflected in the overall insurance contract liability without being identified as a separate component in the balance sheet. If the Premium Allocation Approach(PAA) is used and the group of contracts is less than one year, the insurer has an option of recognizing the insurance acquisition cashflows as expenses or income instead. However, if these are recognised as assets and liabilities, they will be derecognized when the group of insurance contracts to which the cash flows are allocated is recognised.

Liability For Remaining Coverage (LRC) is the equivalent for current Unearned Premium Reserves. This will be included in the overall insurance liability in the balance sheet under IFRS17 and separately identified as the liability for remaining coverage in the notes with a detailed roll forward provided.

Stakeholders will be able to analyse the LRC by components (present value of cash flows, adjustment for risk and Contractual Service Margin) if the General Measurement (GM) approach is used. If the Premium Allocation Approach (PAA) approach is used showing components is not a strict requirement.

Liability For Incurred Claims (LIC) is the equivalent of Claim or Loss Reserves (IBNR, outstanding claims, IBNER, etc.) and will be included in the overall insurance liability on the balance sheet under IFRS17. It will be separately identified as liability for incurred claims in the notes, with a detailed roll forward. In principle, the liability equals the probability-weighted expected cash outflows plus explicit adjustment for risk allowing for the time value of money. The components are reported in the notes separately for both the PAA and GM approaches.

IFRS4 vs IFRS17 Presentation of Income Statement

Under IFRS17, Insurers would be expected to disaggregate amounts recognised in statement of financial performance (statement of profit or loss and other comprehensive income) into insurance service result and insurance finance income or expenses. Insurers would also be expected to report separately income and expenses from insurance contracts held from income and expenses from reinsurance contracts held.

Under IFRS17, Premiums will no longer be shown in the income statement but will be disclosed in the notes and commentary. Revenue and expenses will be recognised as earned (not received) or incurred (not paid). The statement of financial performance will have two main components; insurance service result and net financial result. Below is an expansion of insurance service result.

Insurance Service Result

The Insurance service result consists of insurance revenue minus insurance service expenses.

The insurance revenue for a group of contracts is an amount of premiums paid to an insurer adjusted for a financial effect and excluding any investment components. Revenue is recognised as service is provided (earned) instead of when premiums are due to be received.

Insurance revenue can also include the following aspects;

·        Amounts related to insurance acquisition cash flows;

·        Allocation of Contractual Service Margin to Profit and Loss if the PAA is not used;

·        Risk adjustment for non-financial risk, excluding any amounts allocated to the loss component of the liability for remaining coverage;

·        Insurance service expenses , excluding any amounts allocated to the loss component of the liability for remaining coverage;

The separate components of insurance revenue do not need to be included in the main statements. However, these are included in the notes to help better understand the financial statements.

The perceived size of organizations might change due to the new metrics of recognizing revenue as some stakeholders place emphasis on the amount of revenue received as a metric of performance.

Insurance Service Expenses will be recognised as they are incurred and not when they are paid.

Insurance service expenses will consist of;

·        Incurred claims (excluding repayments of investment components).

·        Amortization of insurance acquisition cash flows.

·        Changes in fulfilment cash flows that relate to past services, that is, relating to the liability for incurred claims.

·        Changes in fulfilment cash flows that relate to future service, but which do not adjust the Contract Service Margin, i.e., losses on onerous groups of contracts and reversals of such losses; and

·        Other incurred service expenses.

Results on reinsurance are also shown separately. Information on insurance service expenses need to be disaggregated in the statements, unlike on insurance revenue, when its relevant to aid understanding of the insurer’s financial performance.

Net Financial Result

The net financial result consists of insurance finance (investment) income less insurance finance expenses.

This is made up of changes in the carrying amount of groups of insurance contracts due to accretion of interest, changes in discount rates and financial risk.

Entities are required to make an accounting policy choice between; presenting insurance finance income or expenses wholly in profit or loss and disaggregated between profit or loss and other comprehensive income. This gives insurers a chance to choose how they present their management of financial risk and the effects of changes in the risk adjustment.

Other Comprehensive income contains all other insurance finance income and expenses not included in the net financial result in the Profit or Loss .

IFRS17, in general will increase the comparability of accounts. However, the choice of including insurance finance income wholly in profit/loss or disaggregating between profit and loss and other comprehensive income may potentially reduce the comparability of outcomes between insurers.

Conclusion

IFRS17 highlights the minimum amount of information to be presented in the statement of financial position and statement of financial performance. However, insurers could provide further information in the statements or expand some lines of certain components. This is done to make the relationship between the reconciliations done and the statements more understandable. The information included in the financial statements is supplemented by disclosures which assist to explain the amounts recognised on the face of these statements .

Due to the new measurement and presentation of accounts requirement under IFRS17, the overall financial position and performance for entities might change after implementing IFRS17. As is recommended with any new accounting standard, insurers initially show new and old formats under a transition period. Preparers of financial statements are best placed to give additional guidance for their different stakeholders.

In general, IFRS17 is expected to increase the comparability of financial statements between entities allowing investors and other key stakeholders to make more informed decisions.

Disclaimer

This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

This article represents views of the authors and their understanding of their sources.

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References

·        EY. (May 2018). Applying IFRS 17 A closer look at the new Insurance Contracts Standard.

·        International Accounting Standards Board (IASB). (May 2017). IFRS 17 Insurance Contracts.

·        International Accounting Standards Board (IASB). (May 2017). IFRS 17 Insurance Contracts- Effects Analysis.

·        International Accounting Standards Board (IASB). (May 2017). Illustrative examples on IFRS 17 Insurance Contracts

·        Wozniak, W. and Hupert, A. (March 2019). Introduction to IFRS 17-3 Blocks