In May 2017, the International Accounting Standards Board (IASB) issued IFRS 17: Insurance Contracts, which replaced IFRS 4. It is a new insurance contracts accounting standard, which will be effective from 1 January 2023 and require one year of comparative disclosures.
Required date of application for comparative purposes: 1 January 2023
The commencement of IFRS 17 in 2023 will represent a significant change in terms of the presentation and interpretation of financial statements for many insurance companies. Given its scale, significance and complexity, IFRS 17 implementation is more than just an accounting change.
It is paramount that internal audit functions are proactive in providing assurance over how implementation of IFRS 17 is governed, managed and executed.
Key challenges of IFRS 17 implementation
For most insurers, IFRS 17 represents a major transformation in the way that insurance contracts are accounted for and the extent of change required is significant. Below are some challenges insurers will most likely face while implementing IFRS 17:
Implementing IFRS 17 will require management to make technical decisions and judgements which may have a material impact on the business and the financial reporting process.
A diverse range of approaches and outcomes
IFRS 17 provides principles-based requirements and therefore it generally does not prescribe specific detailed methods. Selecting appropriate techniques and developing estimates will involve a high degree of management judgement, and methods may vary between preparers. It is important that there is strong governance over the way judgement is exercised.
Implementation of the Contractual Service Margin (CSM) Module
An entirely new solution needs to be deployed to calculate the CSM—not only at inception, but throughout the lifespan of a contract resulting in new data management capabilities.
Time and effort to implement
The new requirements will have a range of consequences for the design and use of technology and systems, and the role of actuaries and other specialists. They will introduce considerably more estimates and judgement into the preparation of financial statements and change the shape and content of financial reporting for insurers. Implementation programs may be large, complex and expensive. End-to-end finance, actuarial and IT processes will be impacted. Orchestrating a new operating model to deliver IFRS 17 will require significant effort and process redesign.
General ledger and chart of accounts
IFRS 17 triggers significant changes to the chart of accounts in order to capture CSM on the balance sheet and CSM amortization on the profit and loss statement with corresponding posting logic to reflect these changes.
Reporting and disclosure
There will be a significant number of additional reporting requirements including the introduction of new IFRS 17 disclosures to be produced.
How can KPMG help?
KPMG’s internal audit professionals specializing in the insurance sector can support your internal audit team in a number of ways:
- Work with your internal audit team to develop an audit plan to provide insight over each aspect of the remaining IFRS 17 program
- Deliver end-to-end IFRS 17 program as a strategic sourcing partner to your internal audit team
- Provide insight on quality over the coverage of activities undertaken by your internal audit team in relation to the IFRS 17 program
- Deliver training to your internal audit team to help them successfully execute on IFRS 17 related activities – program assurance and auditing the ‘new finance’ after implementation