IASB published an article on the annual cohort requirement in the IFRS 17 standard on insurance contracts. In the article, the IASB Chair Hans Hoogervorst explains the IASB decision to retain, unchanged, the annual cohort requirement in IFRS 17 for grouping insurance contracts to measure and recognize profit. IASB has decided annual cohorts are necessary to provide useful information about the financial performance of an insurance company, in particular about the changes in profitability over time. Any exemption from the requirement, even if aimed at the very limited population of contracts for which the costs and benefits of the requirement might be open to question, runs too great a risk of an unacceptable loss of information.
IASB has concluded its re-deliberations of the exposure draft of targeted amendments to IFRS 17. The requirement to use annual cohorts as part of the process of accounting for the contractual service margin has been the cause of much debate since IFRS 17 was issued. In their responses to the exposure draft, some stakeholders advocated the removal or amendment of the annual cohort requirement for some or all insurance contracts. However, IASB decided, in February 2020, to confirm the requirements in IFRS 17 relating to annual cohorts.
IASB considered different approaches for the aggregation of insurance contracts into groups or portfolios, including segregation based on similar profitability. The analysis concluded that the best approach is one where insurance contracts are broadly grouped based on expected profitability at initial recognition, including the separation of any contracts that are onerous at initial recognition. To this, the annual cohort requirement was added, meaning that all contracts in a group must have originated within a twelve-month period. IASB decided that the cohort approach is essential to ensure that aggregation is not so great as to render profit measures meaningless. If annual cohorts are not applied, then it is likely that:
- there will be co-mingling of different generations of contracts with different profitability, or different changes in profitability, which could result in profit being anticipated or deferred rather than being recognized as it is earned. These effects on the recognition of profit obscure the presentation of the effects of different pricing decisions at different times, resulting in a lack of accountability for such decisions and impaired ability for users of financial statements to model future profitability.
- the recognition of a loss arising from onerous insurance contracts would be delayed, potentially for many years.
As a result, the absence of annual cohorts might lead to highly imprudent accounting, because of the failure to recognize profits or losses on contracts in the appropriate periods. IASB is currently finalizing the amendments to aid implementation of IFRS 17 and expects to issue them in June 2020.
Keywords: International, Insurance, Accounting, IFRS 17, Insurance Contracts, Annual Cohorts, IASB
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