Updates on Financial Accounting and Reporting

IFRS 17: Insurance Contracts

IFRS 17, effective for annual reporting periods beginning on or after January 1, 2023
(with early application allowed if IFRS 9 is also applied), establishes principles for recognizing,
measuring, presenting, and disclosing insurance contracts. The standard ensures financial
statements provide relevant and faithful information about these contracts, enabling users to
assess their impact on an entity’s financial position, performance, and cash flows.
IFRS 17 applies to:
 Insurance and reinsurance contracts issued or held.
 Investment contracts with discretionary participation features.
Certain service-based contracts may fall under IFRS 15 if they meet specific conditions.

Key Principles and Definitions

1. Insurance Contracts
An insurance contract is an agreement where one party accepts significant
insurance risk from another. These contracts often combine financial and service
components with long-term, variable cash flows.
A portfolio of insurance contracts refers to contracts with similar risks that are
managed together.
2. Measurement Approach
IFRS 17 requires:
 Future cash flows to be measured, with profit recognized over the service
period.
 Separate presentation of insurance service results and finance
income/expenses.
 An accounting policy choice for recognizing insurance finance
income/expenses in profit or loss or other comprehensive income.
The contractual service margin (CSM) represents unearned profit recognized as
services are provided.
The fulfillment cash flows are the present value of expected future cash flows,
including a risk adjustment.
3. Separation of Components
Insurance contracts may include components subject to different accounting
standards, such as:
 Financial instruments under IFRS 9.
 Service contracts under IFRS 15.
Entities must assess and separate these components when necessary.
Grouping and Recognition of Contracts
1. Contract Grouping
Contracts are grouped based on risk similarity and expected profitability into:
 Onerous contracts (expected to incur losses).
 Profitable contracts (unlikely to become onerous).
 Other contracts.
Contracts issued more than a year apart cannot belong to the same group.
2. Recognition of Insurance Contracts
Insurance contracts are recognized at the earliest of:
 The start of coverage.
 When the first payment is due.
 When they become onerous.
Initial measurement includes fulfillment cash flows and the contractual service margin.

Measurement and Valuation

1. Discount Rates
Discount rates reflect:
 Time value of money.
 Market prices for financial risks.
 Liquidity characteristics of insurance contracts.

2. Risk Adjustment
The risk adjustment accounts for uncertainty in non-financial risks.
3. Subsequent Measurement
Measurement includes:
 Remaining coverage (services yet to be provided).
 Incurred claims (past claims and payments).
If a contract becomes onerous, losses are recognized immediately.
4. Premium Allocation Approach (PAA)
The PAA is an optional simplification for short-term contracts, streamlining liability
measurement.

Modification and Derecognition

A contract is modified or derecognized if there is a substantive change in terms or
fulfillment conditions.

Presentation and Disclosure

1. Financial Statement Presentation
Insurance assets and liabilities must be presented separately, distinguishing:
 Insurance service results.
  Finance income or expenses.
Premiums are not recognized as revenue unless they align with IFRS 17’s
recognition criteria.
2. Disclosure Requirements
Entities must provide qualitative and quantitative disclosures on:
 Recognized amounts.
 Key judgments.
 Risk exposures.

Transition to IFRS 17
1. Transition Approaches
Entities transitioning to IFRS 17 must apply the standard retrospectively unless
impractical. If full retrospective application is not possible, entities may use one of the
following approaches:
a. Full Retrospective Approach (FRA)
 Requires restatement of past contracts as if IFRS 17 had always been
applied.
 Uses historical data to reconstruct fulfillment cash flows and contractual
service margin (CSM).
 Ensures maximum comparability but may be impractical due to data
limitations.
b. Modified Retrospective Approach (MRA)
 Permitted when the full retrospective approach is impractical.
 Requires reasonable estimates based on available historical data.
 Adjustments are made to approximate retrospective application while
complying with IFRS 17 principles.
c. Fair Value Approach (FVA)
 Used when neither FRA nor MRA is feasible.
 Measures insurance contract liabilities at fair value on the transition date.
 Establishes the CSM or loss component based on fair value at transition.

2. Transition Date and Comparative Information

 The transition date is the beginning of the annual reporting period immediately
before the date of initial application.
 Entities must provide comparative financial statements adjusted under IFRS 17,
except for certain exemptions.
3. Impact on Financial Statements
Transitioning to IFRS 17 affects financial reporting in several ways:
 Recognition and measurement: Previously recognized profits may be reallocated
to the contractual service margin.
 Presentation changes: Insurance revenue is reported differently from IFRS 4,
focusing on services provided rather than received premiums.
  Disclosures: Entities must provide extensive disclosures on the transition’s
impact, including explanations of the chosen approach and key assumptions.
Entities must apply a retrospective approach unless impractical. In such cases,
they may use a:
 Modified retrospective approach.
 Fair value approach.

The transition to IFRS 17 is a major shift that impacts how insurers recognize revenue,
measure liabilities, and disclose financial performance. While the full retrospective approach is
preferred, practical alternatives such as the modified retrospective and fair value approaches
provide flexibility for companies facing data limitations. Successful implementation requires
careful planning, system upgrades, and alignment with regulatory frameworks to ensure
compliance and transparency.

Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)

Amendments to IAS 1: Non-Current Liabilities with Covenants
The International Accounting Standards Board (IASB) has issued "Non-current Liabilities
with Covenants (Amendments to IAS 1)" to clarify how conditions that must be met within 12
months after the reporting period impact the classification of liabilities. These amendments take
effect for annual reporting periods beginning on or after January 1, 2024.
In January 2020, the IASB issued "Classification of Liabilities as Current or Non-current",
amending IAS 1: Presentation of Financial Statements. These amendments clarified how
entities should classify financial liabilities as current or non-current in specific scenarios. They
became effective from January 1, 2023, with early adoption permitted.
However, in December 2020, the IFRS Interpretations Committee received inquiries
about the application of these amendments to certain fact patterns. Based on feedback, the
matter was referred to the IASB, which recognized situations it had not explicitly considered
when developing the 2020 amendments.

Key Amendments
In response, the IASB issued further modifications to IAS 1, specifically addressing:
 Classification of liabilities: Only covenants that must be complied with on or before the
reporting date affect whether a liability is classified as current or non-current.
 Disclosure requirements: Entities must disclose information in the financial statement
notes to help users understand the risk of non-current liabilities becoming repayable
within 12 months.
 Deferral of the 2020 amendments: The effective date of the Classification of Liabilities as
Current or Non-current amendments has been postponed to January 1, 2024.
 The IASB decided not to finalize three proposals from its November 2021 exposure
draft due to concerns about cost, necessity, and effectiveness:
1. Separate presentation of non-current liabilities with covenants in the statement of
financial position.
2. Disclosure of expected compliance with covenants after the reporting date.
3. Clarifications on when an entity loses the right to defer settlement of a liability.

Implementation
The amendments must be applied retrospectively in accordance with IAS 8, with early
application allowed.
 References
IAS Plus. (n.d.-a). https://www.iasplus.com/en/news/2022/10/ias-1
IAS Plus. (n.d.-b). https://www.iasplus.com/en/standards/ifrs/ifrs-17
IFRS - IFRS 17 Insurance contracts. (n.d.). https://www.ifrs.org/issued-standards/list-of-
standards/ifrs-17-insurance-contracts/