Discussions about possible amendments to address stakeholders’ concerns and implementation challenges have now concluded, giving insurers more clarity about the proposed changes to IFRS 17 Insurance Contracts. 

At its April 2019 meeting, the International Accounting Standards Board (the Board) confirmed that it will propose that: 

• IFRS 17’s effective date be deferred to 1 January 2022; and
• the temporary exemption from applying IFRS 9 Financial Instruments granted to insurers meeting certain criteria be extended to 1 January 2022.  

The Board also reviewed all of the proposed amendments to IFRS 17 as a whole and discussed additional improvements and sweep issues.

An exposure draft (ED) to amend IFRS 17 is expected to be published in late June 2019.

“We now have clarity on the proposed changes. The amendments are helpful, but implementing IFRS 17 is still a complex and significant undertaking. Many insurers will need to step up the pace of their implementation efforts to reach the finish line with systems and processes tested and results understood by management and investors.”

Mary Trussell, KPMG’s Global Lead, Insurance Accounting Change

The Board reviewed in aggregate all of the amendments to IFRS 17 tentatively agreed since November 2018 and observed that they met the relevant criteria it had set for amending the standard. 

The Board was satisfied that the applicable due process steps for developing an ED had been followed, so the staff were given permission to begin the balloting process for the ED.

To align with the proposed new effective date of IFRS 17, the Board tentatively decided that the proposed amendments would also have an effective date of 1 January 2022.

Additional amendments proposed

The Board tentatively decided to amend IFRS 17 to clarify the following additional issues.

Investment components in insurance contracts

An investment component is the amount that an insurance contract requires the insurer to repay to a policyholder in all circumstances, as discussed by the Transition Resource Group (TRG) in April 2019. Find out more ►

A distinct investment component is not separated from a host insurance contract if it meets the definition of an investment contract with discretionary participation features and is therefore in the scope of IFRS 17.

Contractual service margin

Under IFRS 17’s general measurement model, the contractual service margin is not adjusted for changes relating to the time value of money or financial risk that affect: 

• investment components; or
• the risk adjustment for non-financial risk, where changes caused by the effects of the time value of money or financial risk are disaggregated from those caused by non-financial risk (see TRG discussion in April 2019).

This is because the effects of these changes are insurance finance income or expenses.

Measuring insurance cash flows

All changes in the measurement of insurance contracts resulting from changes in underlying items are to be treated as changes related to financial risk assumptions (see TRG discussion in April 2019).

Accounting for direct participating contracts

An insurer can discontinue using the risk mitigation option only if the eligibility criteria cease to be met.

Other issues discussed

The Board also discussed the following topics but decided not to propose any amendments in these areas.

• Potential accounting mismatches when an insurer disaggregates insurance finance income or expense between profit or loss and other comprehensive income under the general measurement model or the variable fee approach.
• Disclosures of reconciliations of insurance contracts when cash flows are net-settled – e.g. some reinsurance contracts and some arrangements with brokers or agents. 
• Restatement of comparative information when IFRS 17 and IFRS 9 are initially applied at the same time.

The Board’s normal due process requires the ED to be followed by a public comment period, which is typically 120 days but could be shorter. At its May 2019 meeting, the Board will set the comment period and discuss any sweep issues. The Board intends to publish the ED at the end of June 2019. 

“The Board’s discussions give stakeholders even more insight into the thinking behind the proposed changes to IFRS 17. Insurers need to start addressing the impact on their business, and preparers and users of financial statements should get ready to comment on the forthcoming exposure draft to communicate any concerns they may have.”

Joachim Kölschbach, KPMG’s Global IFRS Insurance Leader

You can read our coverage of the Board’s proposed amendments and the TRG’s discussions in our online magazine Insurance – Transition to IFRS 17.

Please watch this space for further updates and speak to your usual KPMG contact to find out more about the Board’s deliberations.

Visit home.Kpmg/ifrs17 to read all of our insights on the new insurance contracts standard. Also, our insights on insurers’ progress with IFRS 17 and IFRS 9 implementation can be found on our In it to win it web page.