IASB Article on Reducing Gap Between Insurance and Other Industries

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