The Exposure Draft of proposed amendments to IFRS 17 is now live
In May 2017, after almost 20 years of discussions, International Accounting Standard Board (IASB) issued International Financial Reporting Standard 17 (IFRS 17) that aims to create consistent and principles-based accounting standard for all types of insurance contracts.
Since then, various challenges and concerns have been raised by the stakeholders while implementing the standard. As a response, IASB decided to propose targeted amendments to IFRS 17. These amendments are based on the implementation questions submitted to the Transition Resource Group for IFRS 17 (TRG) up to April 2019.
A 90 days period was set for submitting any comments towards proposed amendments. IASB will afterwards evaluate these and decide whether additional adjustments are necessary. We can expect the final amendments for IFRS 17 to be issued in Q2 2020.
Which amendments are the most important ones?
The Exposure Draft that has just been published covers several amendments to IFRS 17. The full version of the document can be found here.
Out of the proposed changes, we find the ones regarding the following areas to be the most relevant and important for the Czech market:
- Deferral of the date of initial application of IFRS 17 and expiry date for the temporary exemption from applying IFRS 9 until 1 January 2022
Entities will be required to apply IFRS 17 for annual periods beginning on or after 1 January 2022. This also relates to the expiry date of temporary exemption from applying IFRS 9, which has been postponed by 1 year as well. Entities will be therefore required to apply IFRS 9 for annual periods beginning on or after 1 January 2022.
- Alignment in the recognition of gains from proportionate reinsurance contracts held when underlying contracts are onerous
Amendment allows entities to align any possible gains on initial recognition from proportionate reinsurance contracts held with losses on underlying onerous contracts. From our point of view, this will help companies solve an important methodological issue. However, we expect that even after the proposed change, accounting of reinsurance contracts held will remain a complex area where market best practice in interpretations of many points is yet to be established.
- Recognition of acquisition cash flows relating to expected contract renewals as an asset and related disclosure requirements
The amendment requires entities to recognise insurance acquisition cash flows allocated to expected contract renewals as an asset, rather than as a part of the measurement of the fulfilment cash flows of the initial contracts. We expect this change to reduce the number of insurance contracts that are determined to be onerous at initial recognition.
- Simplified presentation of insurance contracts in the statement of financial position
By the requirements of IFRS 17, entities have to present insurance contracts that are assets separately from those that are liabilities. According to the proposed amendment, such separation of contracts should be done on the portfolio level, rather than at the group of contracts level. This will likely reduce the size of insurance contracts presented as assets, since many groups of insurance contracts will switch between asset and liability positions, whereas most portfolios of insurance contracts are expected to be consistently in a liability position.
Even though the Exposure Draft was designed not to unduly disrupt the IFRS 17 implementation processes already underway, it offers significant refinements and adjustments to the requirements that will have an impact on the preparations of insurance companies and the resulting financial statements.
We would therefore recommend insurance companies to closely monitor these open points and their development and to prepare for incorporation of these changes into their ongoing preparations for IFRS 17 implementation.
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