Gary Kabureck of IASB published a feature that examines reducing the gap between insurance and other industries. For companies applying IFRS Standards, the accounting for insurance contracts differs significantly from the accounting for other contracts. The article outlines the similarities between the key requirements in IFRS 17 and those in other IFRS standards. These key requirements include the measurement of obligations at current value and the recognition of revenue as a company provides services to its customers.
IFRS 17 requires an insurer to report on the balance sheet its obligations from insurance contracts as the total of fulfillment cash flows and contractual service margin. The author points out that measurement of an insurer’s obligations at current value is consistent with the requirements in IAS 37 on provisions, contingent liabilities, and contingent assets for provisions and with those in IFRS 9 on financial instruments for financial liabilities. Recognition of profit at the time services—such as insurance coverage—are provided is consistent with IFRS 15 on revenue from contracts with customers. Insurance obligations can also be regarded as having two components: liability for remaining coverage—measurement of which is broadly consistent with IFRS 15; and liability for incurred claims—measurement of which is broadly consistent with IAS 37.
IFRS 17 requires insurers to present, in the income statement, the revenue for insurance services determined in a way that is consistent with the general principles in IFRS 15. IFRS 17, consistent with IFRS 15, requires that the balance sheet reports the insurance obligations and the income statement reports progress toward satisfying the performance obligation in the contracts. The obligations to repay deposits to the policyholder, if not included in an insurance contract, would be measured and presented in accordance with IFRS 9. When a deposit is interrelated with the obligation to provide insurance coverage it is measured in accordance with IFRS 17. However, it would not faithfully represent the similarities between financial instruments within the scope of IFRS 9 and deposits embedded in insurance contracts within the scope of IFRS 17 if an insurer were to present the receipts and repayments of such deposits as insurance revenue and incurred claims. Accordingly, the requirements in IFRS 17 exclude such deposits from insurance revenue and incurred claims.
Overall, the author believes that IFRS 17 on insurance contracts will help reduce the comparability gap between the accounting in the insurance industry and the accounting in other industries. The author believes that changes introduced by IFRS 17 will enable a wider range of users to understand insurers’ financial statements and compare them with the financial statements of companies within and outside the insurance industry. As with the revenue in any other industry, insurance revenue will exclude deposits and reflect only the services provided. Apart from facilitating cross-industry comparability, this change will make easier for non-specialist investors to understand insurers’ income statement.
Keywords: International, Insurance, Accounting, Banking, IFRS 17, IFRS 9, IFRS 15, IAS 37, Insurance Obligations, Presentation of Revenue, IASB
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APRA has concluded its review of the comprehensive plans of authorized deposit-taking institutions for the assessment and management of loans with repayment deferrals.
ESAs (EBA, EIOPA, and ESMA) published the first joint report that assesses risks in the financial sector since the outbreak of the COVID-19 pandemic.
BoE and HM Treasury confirmed that the COVID Corporate Financing Facility (CCFF) will close for new purchases of commercial paper, with effect from March 23, 2021.
ECB published a decision allowing the euro area banks under its direct supervision to exclude certain central bank exposures from the leverage ratio.
ESAs launched a survey seeking feedback on the presentational aspects of product templates under the Sustainable Finance Disclosure Regulation (SFDR or Regulation 2019/2088).
ECB published input of the European System of Central Banks (ESCB) into the EBA feasibility report on reducing the reporting burden for banks in EU.
EC adopted a decision determining, for a limited period of time, that the regulatory framework applicable to central counterparties, or CCPs, in the UK and Northern Ireland is equivalent to the requirements laid down in the European Market Infrastructure Regulation (EMIR or Regulation 648/2012).
EBA has decided to phase out the guidelines on legislative and non-legislative moratoria of loan repayments, in accordance with the earlier specified end of September deadline.
EBA published an Opinion addressed to EC to raise awareness about the opportunity to clarify certain issues related to the definition of credit institution in the upcoming review of the Capital Requirements Directive and Regulation (CRD and CRR).
ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk.