United States

IASB issues standard for insurance accounting


The International Accounting Standards Board (IASB) recently issued International Financial Reporting Standard (IFRS) 17, Insurance Contracts, which replaces the current myriad of accounting approaches allowed under IFRS 4 with a single approach that requires all insurance contracts to be accounted for in a consistent manner. IFRS 17 requires a company that issues insurance contracts to report them on the balance sheet as the total of:

  • The fulfilment cash flows — the current estimates of amounts that the insurer expects to collect from premiums and pay out for claims, benefits and expenses, including an adjustment for the timing and risk of those cash flows; and
  • The contractual service margin — the expected profit for providing future insurance coverage (i.e., unearned profit).

The measurement of the fulfilment cash flows reflects the current value of any interest-rate guarantees and financial options included in the insurance contracts. IFRS 17 requires a company to update the fulfilment cash flows at each reporting date, using current estimates that are consistent with relevant market information.

IFRS 17 requires a company to provide information that distinguishes two ways insurers earn profits from insurance contracts:

  • The insurance service result, which depicts the profit earned from providing insurance coverage; and
  • The financial result, which captures: (a) investment income from managing financial assets; and (b) insurance finance expenses from insurance obligations—the effects of discount rates and other financial variables on the value of insurance obligations.

When applying IFRS 17, changes in the estimates of the expected premiums and payments that relate to future insurance coverage will adjust the expected profit (i.e., the contractual service margin for a group of insurance contracts will be increased or decreased by the effect of those changes). The effect of such changes in estimates will then be recognized in profit or loss over the remaining coverage period as the contractual service margin is earned by providing insurance coverage. If the amounts the insurer expects to pay out for claims, benefits and expenses exceed the amounts the insurer expects to collect from premiums, either at the inception of the contracts or subsequently, the contracts are loss making and the difference will be recognized immediately in profit or loss.

IFRS 17 requires a company to report as insurance revenue the amount charged for insurance coverage when it is earned, rather than when the company receives premiums. In addition, IFRS 17 requires that insurance revenue excludes the deposits that represent the investment of the policyholder, rather than an amount charged for services. Similarly, IFRS 17 requires that companies present deposit repayments as settlements of liabilities rather than as insurance expenses.

The standard applies to an entity's first annual IFRS financial statements for a period beginning on or after January 1, 2021. A company may choose to apply IFRS 17 before that date, but only if it also applies IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers.