The International Accounting Standards Board (IASB) issued a standard for insurance contracts Thursday to help investors and others better understand insurers’ risks exposure, profitability, and financial position.
IFRS 17, Insurance Contracts, replaces IFRS 4, which was implemented in 2004 as an interim standard intended to limit changes to existing insurance accounting practices. The changes were deemed necessary because the interim standard allowed insurers to use different accounting policies to measure similar insurance contracts written in different countries. This led to many different approaches that made it difficult for investors to compare and contrast the financial performance of otherwise similar companies, according to a news release.
The new standard creates one model for all insurance contracts in all IFRS jurisdictions, aiming to provide transparent reporting about a company’s financial position and risk.
“IFRS 17 replaces the current myriad of accounting approaches with a single approach that will provide investors and others with comparable and updated information,” IASB Chairman Hans Hoogervorst said in a news release.
The new standard requires all insurance contracts to be accounted for in a consistent manner meant to benefit both investors and insurance companies, solving the comparison problems stemming from IFRS 4. Current values – instead of historical costs – will be used to account for insurance obligations, and the information will be regularly updated to provide more useful information to financial statement users.
Other changes to insurance contracts, which are illustrated on a fact sheet, include:
- Some companies have measured contracts using out-of-date information; now companies will measure them at current value.
- Some companies have measured contracts based on the value of their investment portfolios; now they will measure them based only on the obligations created by these contracts.
- Some companies have not provided consistent information about the sources of profit recognised from the contracts; now companies will provide consistent information about components of current and future profits from contracts.
IFRS 17 goes into effect January 1st 2021, and early application is permitted.
Because of the range of accounting methods in use, some countries will be affected more than others by the new standard. The IASB will support those implementing IFRS 17, including by establishing a Transition Resource Group, for which it is calling for members.
Also on Thursday, the IASB published for public consultation the proposed IFRS Taxonomy Update for IFRS 17. Comments must be received by September 18th.
—Anslee Wolfe is a freelance writer in Colorado Springs, Colorado. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at Kenneth.Tysiac@aicpa-cima.com or 919-402-2112.