IFRS 17 "Insurance Contracts"
Bilal Ahmad
Fractional CFO for Startups | Financial Modeling to Drive Growth and Profitability | Empowering Founders with Data-Driven Financial Leadership
IFRS 17 "Insurance Contracts" is a significant international financial reporting standard issued by the International Accounting Standards Board (IASB), specifically addressing the recognition, measurement, presentation, and disclosure of insurance contracts within financial statements. It was developed to provide a more consistent, transparent, and comparable approach to the accounting for insurance contracts. Here are the key aspects of IFRS 17:
1. Scope: IFRS 17 applies to all types of insurance contracts (including reinsurance contracts that an entity holds), regardless of the type of institutions that issue them. This includes both life and non-life insurance contracts.
2. Recognition of Insurance Contracts: An entity is required to identify portfolios of insurance contracts, where a portfolio consists of contracts that are subject to similar risks and are managed together.
3. Measurement of Insurance Contracts: The standard introduces a new measurement model – the General Measurement Model, also known as the Building Block Approach. This model consists of:
- The estimated future cash flows (including premiums, claims, and benefits);
- Adjustment for the time value of money and the financial risks associated with the future cash flows (discount rate);
- A risk adjustment for non-financial risks; and
- A contractual service margin (CSM) representing the unearned profit of the contract.
4. Presentation in Financial Statements: IFRS 17 requires separate presentation of the insurance service result (earned revenue minus incurred claims and other insurance expenses) and insurance finance income or expenses in the statement of profit and loss.
5. Revenue Recognition: Under IFRS 17, revenue is recognized as the entity provides insurance coverage, and expenses are recognized when incurred. This aligns revenue and expense recognition with the transfer of services to the policyholder.
6. Discount Rate: The discount rate used to measure the present value of cash flows should reflect the characteristics of the cash flows, including the timing and currency in which they will be paid.
7. Risk Adjustment: The risk adjustment for non-financial risk reflects the compensation the entity requires for bearing the uncertainty about the amount and timing of the cash flows arising from non-financial risk.
8. Contractual Service Margin (CSM): The CSM represents the unearned profit that the entity expects to earn over the period it provides coverage. The CSM is released to profit or loss over the coverage period.
9. Disclosures: Extensive disclosures are required by IFRS 17 to enable users of financial statements to understand the amounts recognized in the financial statements arising from insurance contracts and the nature and extent of risks arising from these contracts.
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