The forthcoming IFRS 17, a new round of field tests for insurers
After many years of development of the new insurance standard, many entities are keen to start as soon as possible their projects to understand the mechanics of the new accounting framework for insurance contracts under IFRS and fully assess its impact on current business and accounting practices.
The International Accounting Standards Board (IASB) is currently conducting a topic-based field work on the new Insurance Phase II Standard (or IFRS 17). This is the fourth round of field work conducted since 2009.
The objective of the field work is to complete further research with participants and get a broader understanding of:
- How entities will interpret specific requirements in the forthcoming insurance contracts Standard; and
- What operational difficulties, if any, entities will encounter in applying the requirements of the new Standard.
This is an important phase of where the IASB is collecting information regarding relevant topics and views from the market before the final rules are issued for implementation by a vast number of insurers globally. The efforts and costs of implementation will depend on various aspects that go from the complexity introduced by the new rules to the IT strategy that each company will adopt.
Participants in the field test were requested to answer a questionnaire including relevant extracts from the staff draft of the Standard. The questionnaire focused on:
- Aggregation of contracts
- Scope of variable fee approach
- Derivatives used to mitigate financial market risk
- Determining the amount of insurance income and expenses in Other Comprehensive Income (OCI)
- Recognition of changes in estimates
The IASB expects to discuss in the 3rd quarter of 2016 any sweep issues that arise from this field work and the continued drafting process.
The forthcoming standard for insurance contracts has many intersections ahead with other IFRS rules such as IFRS 15 Revenue from Contracts with Customers, IFRS 9 Financial Instruments and consequential amendments that might be introduced in other standards. This might add more complexity for the implementation project by each company at the initial phase of implementation.
Applying the new standards for insurance contracts and IFRS 9 will involve the use of increased judgement and application of different concepts and definitions that were not previously in IFRS 4 and IAS 39. Accordingly, greater emphasis will be placed on management to establish good processes for which documentation is contemporaneously prepared and carefully reviewed.
At this stage, developing a roadmap of action steps for each company that aligns with the proposed timeframe of the IASB is crucial.