Accountants Block: IFRS 17 Insurance Contracts incorporated amendments

"IFRS 17 is effective for annual reporting periods beginning on or after 1 January 2023 with earlier application permitted as long as IFRS 9 is also applied."- Statement from the IFRS.

Incase you didn't know; the International Financial Reporting Standards are a set of rules governing the events or activities that should be reported in Financial Statements.

To know what IFRS 17 entails, first you have to understand the insurance contract.

An insurance contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Insurance contract combines features of financial instrument and service contract. In March 2004 the International Accounting Standards Board issued IFRS 4 Insurance Contracts. IFRS 4 was an interim standard which was meant to be in place until the Board completed its project on insurance contracts. It was not well specified or rather it didn't cover most insurance regulations to the detail and had some loopholes.

In May 2017, IFRS 17 was completed, replacing IFRS 4, ensuring major changes in the recognition, measurement, presentation and disclosure of insurance contracts within the scope of IFRS 17.insurance sector financial reporting.

Key Principles in IFRS 17 include:

• "IFRS 17 identifies insurance contracts as those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder;
• separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts;
• divides the contracts into groups that it will recognize and measure;
• recognizes and measures groups of insurance contracts at:

1. a risk-adjusted present value of the future cash flows (the fulfilment cash flows) that incorporates all of the available information about the fulfilment cash flows in a way that is consistent with observable market information; plus (if this value is a liability) or minus (if this value is an asset)
2. an amount representing the unearned profit in the group of contracts (the contractual service margin);

• recognizes the profit from a group of insurance contracts over the period the entity provides insurance contract services, and as the entity is released from risk. If a group of contracts is or becomes loss-making, an entity recognizes the loss immediately;
• presents separately insurance revenue (that excludes the receipt of any investment component), insurance service expenses (that excludes the repayment of any investment components) and insurance finance income or expenses; and
• discloses information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance and cash flows of an entity." - IFRS

For more detailed information read here https://www.ifrs.org/issued-standards/list-of-standards/ifrs-4-insurance-contracts/

Article by Tracy Khatenje