Demystifying IFRS 17: Understanding the Impact on Insurance Contracts

IFRS 17 is the first truly international IFRS Standard for insurance contracts.

1. Who Should Care:

IFRS 17 mainly affects companies in the insurance industry that provide insurance contracts. These are contracts that promise to pay out money to customers in case of specific events, like accidents or health issues. If your company writes insurance contracts, you need to pay attention to IFRS 17.

2. When Does It Apply:

IFRS 17 becomes mandatory starting from January 1, 2021. However, companies can choose to start using it earlier if they also apply two other accounting standards called IFRS 9 (for financial instruments) and IFRS 15 (for revenue from contracts). The transition period is about three and a half years, so companies have time to adjust to the new rules.

3. What Is Changing:

With IFRS 17, there's a big shift in how insurance contracts are accounted for. Here are some key changes:

• Consistency: Previously, insurance companies in different countries used different rules to measure insurance contracts. IFRS 17 makes them use the same rules, making it easier to compare companies and contracts.
• Measurement: Under the old system, some companies used outdated information and didn't consider the time value of money. IFRS 17 requires companies to use current information and include the value of money over time.
• Profit Recognition: Instead of recognising profits when premiums are received, companies will now recognise profits as they provide insurance services. This change gives a better view of the company's financial position and risk.
• Future Profit Info: Companies will also provide information about the profits they expect to make in the future from insurance contracts. This helps people understand how the company is performing and how its performance is changing.

4. How to Prepare:

To get ready for IFRS 17, companies need to:

• Understand the new rules: Learn about the changes and how they'll affect your financial statements.
• Update systems: Adjust your accounting systems to handle the new way of measuring and reporting insurance contracts.
• Train employees: Make sure your finance and accounting teams understand the new standards and how to apply them.
• Communicate: Share the changes with investors, analysts, and other stakeholders so they understand the impact on your financial statements.

As the insurance landscape evolves, IFRS 17 will stand as a vital tool in creating a standardized, reliable foundation upon which the industry can thrive. So, whether you're an insurance professional, investor, or simply curious about financial reporting, embracing the essence of IFRS 17 is a step towards a more transparent and better-informed future.