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June 2020
IFRS 17 clears final hurdle although implementation challenges remain
Insurers still face significant challenges if they are to implement their IFRS 17 programmes on schedule, reveals global survey by Willis Towers Watson.
The International Accounting Standards Board (IASB) released the final insurance contracts standard IFRS 17 (2020) on Thursday 25 June. This is the culmination of almost 23 years of discussion, with IFRS 17 scheduled to take effect with annual reporting cycles beginning on or after 1 January 2023. IFRS 17 (2020) reflects the responses received (including from Willis Towers Watson) from the Exposure Draft Amendments to IFRS 17, published by the IASB in June 2019 following feedback on IFRS 17, as originally issued in 2017.
We at Willis Towers Watson believe that IFRS 17 remains complex. This is due in part to the IASB’s desire to maintain this as a principles-based Standard, rather than one that is prescriptive. Companies, however, continue to be frustrated by the lack of consistency in interpretations of the Standard and, as a result, many continue to face implementation challenges, which have been further compounded by COVID-19. Companies will need to look past the transition to IFRS 17, not only to ensure their systems are equipped to meet the ongoing reporting requirements, but that assumptions and policies made at transition are reasonable for the future.
Main changes to IFRS 17
In response to the consultations between the IASB, the insurance industry, regulators and accounting bodies, major changes made to that Exposure Draft include:
- The extension of the effective date to 1 January 2023 from 1 January 2022 proposed in the Exposure Draft.
- The ability of insurers to recognise gains on the initial recognition of reinsurance contracts held, which cover onerous underlying contracts, which better reflect the reasons for companies entering into reinsurance arrangements.
- The clarification of the treatment of the contractual service margin (CSM) attributable to investment-return service and investment-related service.
- The requirement to allocate some acquisition costs to contract renewals. This more appropriately recognises those situations where a significant up-front investment by an entity is expected to be recovered through future new business.
- The expansion of the risk mitigation option to include reinsurance contracts held where they are used in a manner similar to that of financial instruments. This recognises that reinsurance contracts held are also used to mitigate financial risk.
The European Union is now expected to resume its endorsement process. A number of concerns expressed by EFRAG (the private entity advising the EU) have been addressed in the final IFRS 17, although some issues are still outstanding.
Global IFRS 17 survey
Willis Towers Watson recently conducted a global survey of insurers’ IFRS 17 programmes, so far receiving in excess of 230 responses, including 16 members of the European Insurance CFO Forum. Key initial findings included:
- 76% of the survey participants expect to continue their implementations as originally planned following COVID-19. Nine per cent have been redesigning and 15% pausing parts of their programme.
- In light of the one-year delay to 2023, 59% want to continue as originally planned. 31% want to do more and 10% intend to pause the programme.
- Only 10% of the surveyed companies already have a clear view on the business implications of IFRS 17.
- 55% believe that IFRS 17 earnings / equity will be slightly or much more helpful than current GAAP earnings / equity.
- 59% believe that the need for additional non-GAAP reporting / supplementary reporting will slightly or significantly increase.
Our survey results show that IFRS 17 will be challenging to deliver and will lead to an uncertain future financial reporting landscape.
March 2020
IASB Affirms Commitment to Extend IFRS 17 Effective Date and IFRS 9 Temporary Exemption for Insurers
The International Accounting Standards Board (IASB) today proposed the effective date of IFRS 17 Insurance Contracts be 1 January 2023. This represents a one-year delay to the date proposed in the June 2019 Exposure Draft Amendments to IFRS 17 and a two-year delay to the effective date set out in IFRS 17, as issued in May 2017. In addition, the Board proposed that the expiry date of the IFRS 9 temporary exemption for insurance contracts be similarly extended to 1 January 2023 to coincide with the proposed effective date of IFRS 17.
Ralph Ovsec, Senior Director at Willis Towers Watson, says, “We believe these extensions have addressed a number of the concerns raised by the industry and coordinate implementation efforts of IFRS 17 and IFRS 9. We encourage companies to continue to press forward at current pace and use this additional time to strengthen their processes and procedures as well as allow for more testing, dry runs and contingencies. We also believe a shared effective implementation date for IFRS 17 and IFRS 9 will avoid temporary earnings mismatches that would otherwise exist and reduce implementation costs. The current global environment adds significant resource and time constraints to insurers’ operations, and this additional respite will reduce those near-term pressures on insurers.”
April 2020
IASB Remains Committed to a June 2020 Release of the Final IFRS 17
On 23 April, the IASB staff provided a verbal update to the Board on the initiatives in progress leading to the release of the final IFRS 17, anticipated in June 2020.
Ralph Ovsec, Senior Director, Insurance Consulting and Technology, at Willis Towers Watson, said: “In spite of the challenges posed by COVID-19, the implementation of IFRS 17 remains urgent, as entities need certainty of the amendments to IFRS 17 to avoid unnecessary and undue costs and disruptions in its implementation.”
A pre-ballot draft of IFRS 17 has been circulated to the Board and to a select group of SMEs, and many comments have already been received. The IASB staff is reviewing those comments to confirm whether any further adjustments to IFRS 17 are required. Any further adjustments will be brought to the May 2020 IASB meeting as sweep issues. June 2020 remains the target date for the release of the final IFRS 17. A webcast is being planned to introduce the amendments to stakeholders, with a date yet to be determined.
IFRS 17 was originally published in May 2017 and has been revised following feedback from key stakeholders both before and after the publication of the June 2019 Limited Exposure Draft.
March 2020
IASB Affirms Commitment to Extend IFRS 17 Effective Date and IFRS 9 Temporary Exemption for Insurers
The International Accounting Standards Board (IASB) today proposed the effective date of IFRS 17 Insurance Contracts be 1 January 2023. This represents a one-year delay to the date proposed in the June 2019 Exposure Draft Amendments to IFRS 17 and a two-year delay to the effective date set out in IFRS 17, as issued in May 2017. In addition, the Board proposed that the expiry date of the IFRS 9 temporary exemption for insurance contracts be similarly extended to 1 January 2023 to coincide with the proposed effective date of IFRS 17.
Ralph Ovsec, Senior Director at Willis Towers Watson, says, “We believe these extensions have addressed a number of the concerns raised by the industry and coordinate implementation efforts of IFRS 17 and IFRS 9. We encourage companies to continue to press forward at current pace and use this additional time to strengthen their processes and procedures as well as allow for more testing, dry runs and contingencies. We also believe a shared effective implementation date for IFRS 17 and IFRS 9 will avoid temporary earnings mismatches that would otherwise exist and reduce implementation costs. The current global environment adds significant resource and time constraints to insurers’ operations, and this additional respite will reduce those near-term pressures on insurers.”
February 2020
Minor changes to IFRS 17 as IASB concludes discussion of potential amendments
The International Accounting Standards Board (or Board) met on Tuesday 25 February to further discuss items related to the Exposure Draft (ED) Amendments to IFRS 17, published in June 2019. The meeting prioritised minimal disruption towards implementation of IFRS 17, possibly indicating a resolve to adhere to an effective date of 1 January 2022.
The Board confirmed there would be no change to the level of aggregation of contracts, thereby retaining annual aggregation for grouping of contracts, even those insurance contracts where risk sharing crosses generations. This was despite firms with participating business having expressed practical implementation concerns.
The most significant changes proposed by the Board at the meeting were:
- Further clarity on the treatment of the Contractual Service Margin (CSM) for insurance contracts with investment features, requiring an entity to identify coverage units considering the quantity of benefits and service provided for investment coverage as well as insurance coverage.
- Expanding the use of non-derivative financial instruments to insurance contracts with direct participation features.
- Additional relief under the modified retrospective approach at transition with respect to certain elements affecting investment contracts with discretionary participating features, the effective date of reinsurance contracts held, and for policy choices made that impact prior period interim financial statements.
We think all stakeholders will welcome the conclusion of deliberations on changes to IFRS 17, even if some of the decisions reached do not reflect the wishes of some in the industry. With regard to the determination of the acquisition date of reinsurance contracts, ceding companies should be mindful in assessing potential unintended consequences related to the ability to take reinsurance relief on onerous contracts offered by reinsurance.
While the Board has shown its willingness to re-open issues beyond the scope of the amendments proposed in the ED, the focus of the Board appears to be to minimise disruption to ongoing implementation projects.
The IASB will hold its next board meeting in March when it is expected to take a final decision on the effective date of IFRS 17 (and IFRS 9 for insurers). The current proposal is 1 January 2022, although some respondents have proposed a further one-year delay to 1 January 2023. Staff at the IASB have also confirmed they expect the amendments to be finalised and a standard published in mid-2020.
January 2020
Continued deliberation on certain items of the IFRS 17 Exposure Draft
On 30 January 2020 the IASB continued deliberation on certain items of the IFRS 17 Exposure Draft issued in June 2019, consistent with the schedule agreed in November 2019. The IASB confirmed that it expects to finalise discussion of the remaining technical topics at its February meeting, thereby allowing the Board to consider the overall set of amendments as a package together with any implications for the effective date at the March meeting.
The Board decided not to amend the treatment of contracts acquired in their settlement period, other than on transition to IFRS 17. The treatment prescribed by IFRS 17 represents a departure from current accounting practice in most jurisdictions and will bring additional complexity by requiring entities, largely P&C insurers, to use the GMM and presentation of CSM and revenue on an open portfolio of outstanding claims.
The Board tentatively decided to amend paragraph B137 of IFRS 17, which will impact firms planning on using IFRS 17 for interim reporting. The change, which will enable entities to choose as an accounting policy the ability to change previous interim estimates in subsequent interim or annual reporting, is of significant practical benefit, and will help avoid a potential difference between group and subsidiary reporting. However there are other potential differences between group and subsidiary reporting that firms still need to consider.
The Board also decided that at transition, an entity is required to calculate an asset for insurance acquisition cash flows in respect of acquisition cash flows prior to the transition date relating, wholly or in part, to future unrecognised groups of renewed contracts. The relevant sections of the IFRS 17 Standard: Appendix C – Effective date and transition, will be amended accordingly. If application of the full retrospective approach is impracticable and the modified retrospective approach or the fair value approach are adopted, a determination of an asset for acquisition cash flows will still be required, with separate considerations for each method.
December 2019
IFRS 17: Proposed changes focus on reinsurance contracts
The International Accounting Standards Board (IASB) met on 11 December to begin the process of redeliberating some of the changes proposed in the June Exposure Draft (ED) and has decided to defer discussions on the effective date of IFRS 17 until the extent and complexity of all the amendments has been determined, expected end of February 2020.
The IASB’s intention to allow insurers to recognise gains on reinsurance contracts held in respect of groups of onerous underlying contracts had been welcomed by respondents since it addressed a fundamental accounting mismatch in the original standard. However, most respondents, including Willis Towers Watson, expressed concerns that the scoping of the relief had been drawn too narrowly in restricting use to a very limited range of reinsurance contracts. In response, the Board has agreed to significantly broaden the scope allowing losses on initial recognition of the underlying contracts to be offset by the matching reinsurance.
