In every industry, there are standards and
recommendations on how to carry out several tasks. These standards are to
ensure that work is properly done and several entities within the industry can
collaborate without much hassle. In accounting, there are also several
standards of which one is IFRS 17. IFRS 17 is an International Financial
Reporting Standard issued by the International Accounting Standards Board in
May 2017. In this article, we shall discuss what IFRS 17 is and what problems
it solves.
Why IFRS 17?
There are several other reporting standards
from IFRS with a suffixed number, all of which contain different
specifications. Some standards are a revision of an earlier one.
In many cases, insurance contracts generate
cash flow with substantial variability from one contract to another. Before
IFRS 17, different companies had different ways of reporting insurance
contracts and assessing the impact of these contracts on the financial position
of the company. This also made it difficult to analyze trends in insurance
contracts.
Because insurance contracts often cover
long-term risks, it is difficult to measure the risk of these contracts as they
also have uncertain outcomes. When insurance contracts are not reported
correctly, it is difficult to assess which contracts contribute to
profit-making or loss-making.
Some insurance contracts are measured using
data that was entered upon contract inception. Since insurance contracts are
long-term, the measurement often does not reflect current realities as these
data might be even decades old. Also, some insurers might discount future cash
flows using discount rates that may not be updated after contract inception.
Due to the lack of a standard, insurers in different jurisdictions might make
use of current or historical discount rates or even a mix of both.
Some of the key principles in IFRS 17 are:
- An entity identifies as insurance contracts,
those contracts under which the entity accepts significant insurance risk from
another party which the entity agrees to pay compensation to the policyholder
if an agreed-upon uncertain event occurs. - An entity divides its contracts into groups
that it can recognize and properly measure - An entity 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 - IFRS 17 includes an optional simplified
measurement approach to smaller insurance contracts. - The standard requires insurers to report
insurance contracts on their balance sheet as a total of - The fulfillment cash flows: which is the
estimate the insurer expects to collect for premiums, pay out as claims, and
adjusted for timing and risk of those cash flows - Contractual service margin; the estimated
profit for providing insurance coverage in the future
Conclusion
IFRS 17 provides a standard approach for measuring insurance contracts and their effect on the cash flow of a company. We recommend that you follow the standards outlined so that the effect of insurance contracts on the financial position of your company is not hidden by poor reporting. To learn more about IFRS 17 and other IFRS standards, annualreporting.info“>www.annualreporting.info has all the answers you need!
