Overview

IFRS 17: The First Truly

International IFRS
Dr. Ludovicus Sensi W, CPA, CA

Anggota Komite Disiplin dan Investigasi (KDI) IAPI

Anggota Tim Implementasi SAK Ikatan Akuntan Indonesia

Sumber: Sue Lloyd - IASB

 Lingkup Bahasan

1. Why has IFRS 17 been developed?

2. How IFRS 17 works?
3. Simplified approach
4. Implementation support 2017 - 2021

2
IFRS® Foundation

IFRS 17: the first truly

international IFRS
Standard for insurance
contracts
IAI IFRS International
Seminar
Jakarta, 12 July 2017
Sue Lloyd
IASB Vice-Chair

The views expressed in this presentation are those of the presenter,

not necessarily those of the International Accounting Standards Board (Board)
or
IFRS Foundation.
Copyright © IFRS Foundation. All rights reserved
IFRS 17 Insurance Contracts 2

• IFRS 17 issued on 18 May 2017

– replaces an interim Standard - IFRS 4
– requires consistent accounting for all
insurance contracts, based on a
current measurement model
– will provide useful information about
profitability of insurance contracts

• Effective on 2021
– early application permitted
– one year comparative information
Today’s topics 3

• Why has IFRS 17 been developed

• How IFRS 17 works, including:
– Simplified approach for short-term contracts

• Implementation support
 4

Why has IFRS 17 been

developed?

Copyright © IFRS Foundation. All rights reserved

IFRS 4: lack of comparability 5

Top-20 listed insurance companies using IFRS Standards

Accounting policies applied to Number of Total assets
insurance contracts issued companies (US$ trillions)
Based on guidance in:
• a mix of national GAAP* 8 4.1
• US GAAP 3 1.6
• Canadian GAAP 4 1.4
• other national GAAP 5 2.0
Total 20 9.1

* These companies had subsidiaries in different jurisdictions. They accounted for the
insurance contracts they issued in different jurisdictions using accounting policies
based on requirements of national GAAP for each jurisdiction.

Source: Effects Analysis on IFRS 17

Discount rates used today by IFRS
insurers

22%

35%

Current rates Historical rates Mix of rates

Discount rates used for a sample of life insurers

(2015)
Source: Effects Analysis on IFRS 17
Same company, different pictures 7

Year 1
(in millions of
currency units) GAAP 1 GAAP 2 Difference

Revenue 8,263 10,979 (2,716) (33%)

Operating income 1,416 633 783 55%

Net income 965 337 628 65%

Total equity 8,977 3,872 5,105 57%

Source: Effects Analysis on IFRS 17

To improve financial information 8

IFRS 4 - little transparent or useful IFRS 17 - more transparent and useful

information information
Lack of useful information about • Current assumptions regularly updated
insurance obligations • Options and guarantees fully reflected
• Use of old or outdated • Estimated future payments to settle
assumptions incurred claims reported on a
• Options and guarantees not fully reflected discounted basis.
in measurement of insurance contracts • Discount rate reflect characteristics of
• Time value of money not considered the insurance liability - risks not
when measuring liabilities for incurred matched by assets will be reflected in
claims the accounts
• Use of ‘expected return on assets
held’ • Unearned profit recognised as the
Lack as
of transparency about profitability insurance coverage is provided
discount rate
• Revenue recognised on a cash basis • Additional metrics to evaluate
• Use of many non-GAAP measures performance will be available
Changes to performance presentation 9

IFRS 4* IFRS 17 Key changes

Premiums Insurance revenue - Two drivers of profit presented
separately
Investment income Incurred claims and expenses

Incurred claims and expenses Insurance service result - Insurance revenue excludes
deposits [written premiums
Change in insurance contract disclosed in the notes]
Investment income
liabilities
Profit or loss Insurance finance expenses - Revenue and expense are
recognised as earned or
Net financial result incurred
Profit or loss
- Insurance finance expenses
Insurance finance expenses are excluded from insurance
(optional) service result and are
presented (i) fully in P&L or (ii)
Total comprehensive in P&L and OCI, depending on
income accounting policy

(*) Common presentation in the statement of comprehensive income in applying IFRS

4
To improve comparability 10

IFRS 4—a lack of comparability IFRS 17—a consistent framework

Lack of comparability among insurers
• IFRS companies report insurance
contracts using different practices
• A new framework will replace huge
Non-uniform reporting within variety of accounting treatments
groups
• Insurance contracts of subsidiaries are
consolidated using different practices
Inconsistency with other industries
• Revenue will reflect the services
• Revenue include deposits
provided, and exclude deposits, like
• Revenue reported on a cash basis any other industry
 11

How IFRS 17 works

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IFRS 17 measurement model 12

All insurance contracts measured as the sum of:

• Fulfilment cash flows
• Present value of probability-weighted expected cash flows
• Plus an explicit risk adjustment for insurance risk
• Contractual service margin
• The unearned profit from the contracts

1 2 3
Contractual IFRS 17
PV of future Risk
service asset or
cash flows adjustment liability
margin

Fulfilment cash flows

1
Cash flows 13

• Current estimates of future cash flows

• Probability weighted and unbiased
• Stochastic modelling for financial options
and
guarantees (where necessary)
Contract boundary
Premiums Premiums

Acquisition Expenses Claims and benefits

costs
Considering financial options and guarantees
embedded in the contracts
1
Discount rates 14

• Current market-consistent discount rates relevant to

the liability
• Return premium on assets included only to the
extent that the liability cash flows are themselves
linked to those assets
2
Risk adjustment 15

• Explicit adjustment for the compensation a company

requires for bearing insurance risk
• Part of total unearned profit
– Recognised in P&L as the company is released from
risk
3
Unearned profit—contractual service margin 16

Accretion of P&L
interest Insurance finance expenses

CSM Changes in estimates

balance
that relate to future
service
Recognition in P&L as Insurance revenue
Value of insurance service is
P&L
provided
the new
business
Remaining
unearned
profit

C
balance
S
M
Opening balance Closing balance
for group A for group A

Initial recognition Reporting period Reporting date

Level of aggregation
Grouping objectives 17

• IFRS 17 requires a portfolio to be divided into 1-3 groups

– timely recognition of losses
– resilience of the contracts in a group to becoming onerous
– consistent with requirements in other IFRS Standards
• IFRS 17 will provide:
– information about losses from contracts onerous at initial
recognition
– information about losses when previously profitable groups
of contracts become onerous
Level of aggregation
Grouping illustration for a portfolio 18

Portfolio 1 Entity divides each portfolio into groups

Whole-life insurance  contracts issued within the same year
 information about the contracts’ resilience
  consistent with internal reporting
 exemption for regulatory pricing
 group not reassessed after initial
recognition

have no significant
Contracts possibility
that at initial of
recognition recognised as part
Profitable 
Group A
Unearned profit is
is released as

contracts Group B becoming onerous subsequently, if any of the liability and

are provided
insurance services
Other profitable contracts, if any

Onerous Group C Contracts that are onerous at initial A loss is
contracts  recognition, if any recognised in P&L
Level of aggregation
Annual cohorts 19

• IFRS 17 requires that a group shall not include contracts

issued more than one year apart (ie annual cohort)
• The annual cohort requirement will provide useful trend
information about profitability of contracts written in
different periods
• The profit of a group of contracts will be recognised in
the period the service is provided—and not averaged
with profits of other groups and recognised over the
period of which service is provided for all the groups
Insurance revenue 20

• Revenue recognised reduces liability for remaining coverage

• Equals premiums received (adjusted for time value of money)
attributable to services provided in the period
• Payments to policyholders unrelated to insured event (return of
‘deposits’) are not revenue
Time value of money
Insurance
revenue

Deposits
Liability for remaining coverage
Year 1 Year 2 Year 3 Year 4 Year 5

Premiums
 21

Simplified approach

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Eligibility criteria 22

Reasonable
Coverage
approximatio
period of NO n of the
NO
each
group
contract in
measuremen
the group
t using the
<= 1 year?
core
requirements
YES YES?
May apply Must apply
premium allocation core
approach requirements
Simplifications for short-term contracts 23

A B
Liability for remaining Liability for incurred IFRS 17
coverage claims liability
Contractual
PV of future Risk PV of future
service Risk adjustment
cash flows adjustment cash flows
margin
Split in three blocks not required

A Simplified measurement

B Measurement under the general model, but discounting of

claims to be settled within 1 year not required
 24

Implementation support
2017—2021

Copyright © IFRS Foundation. All rights reserved

Tools for implementation support 25

• Transition Resource Group

• Discussions at the Board meetings and/or the
at
• IFRS Interpretation
Supporting material Committee meetings
(eg webcasts, articles)
• Interaction with submitters
• Research and documentation
• Dedicated webpage with materials to support those
applying IFRS 17
 26

Further information
www.ifrs.org

Copyright © IFRS Foundation. All rights reserved

Further information 27

• IFRS 17 Insurance Contracts—specifies requirements for

accounting for insurance contracts.
• Basis for Conclusions on IFRS 17—summarises the Board’s
considerations in developing the requirements in IFRS 17.
• Illustrative Examples on IFRS 17—illustrate aspects of IFRS
17 but provide no interpretative guidance.
• Effects Analysis on IFRS 17—describes the likely costs and
benefits of IFRS 17.
• Project Summary of IFRS 17—provides an overview of the
project to develop IFRS 17.
• Feedback Statement on IFRS 17—summarises feedback on
the proposals that preceded IFRS 17 and explains the Board’s
response.

Information about implementation support is available at

go.ifrs.org/IFRS-17-implementation.
Contact us 286

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