IFRS 17 Insurance Contracts

Analysis

IFRS 17 Insurance Contracts   

Considerations for the tax department

IFRS 17 introduces a new reporting standard for insurance and reinsurance contracts. It will (be expected to) become effective for financial years beginning on or after January 1, 2023. IFRS 17 is seen as one of the most significant changes in insurance accounting in the past decade. In this article, we will look at the considerations and practical implications for tax departments.

Highlights

  • IFRS 17 causes changes in data requirements and data availability. In safeguarding a proper audit trail, tax departments should consider the changes needed to ensure that all the data required is readily available and documented. A tax control framework could be beneficial to manage these requirements. 
  • It should be considered whether IFRS 17 is followed for tax purposes in relevant jurisdictions – close collaboration across jurisdictions and an impact assessment are key.
  • IFRS 17 may result in vastly different deferred tax balances 
  • IFRS 17 changes will likely cause volatility in comparing insurers’ financial indicators, which could affect transfer pricing.
  • The tax effect of the transition impact should be considered.
  • The IFRS 17 implementation should be closely connected to a overall finance transformation.
  • Tax departments should take the opportunity to enhance tax assurance and optimize internal processes.

IFRS 17

The International Accounting Standards Board (“IASB”) issued the International Financial Reporting Standard 17 for insurance and reinsurance contracts (“IFRS 17”) in May 2017. IFRS 17 will replace IFRS 4 and is aimed to provide standardized insurance accounting to improve global comparability and enhance transparency. It demands a significant change of the (re)insurers’ financial statements; a change in profit recognition patterns; and a major implementation program across the finance and actuarial departments. On the IFRS 17 balance sheet the insurance liability (or asset) replaces all IFRS 4 balance sheet components (including other ways of estimating the liabilities). This is discussed hereafter.

Measurement models

Considering the default valuation approach, fulfilment cash in and outflows relate to the current estimates of amounts that the company expects to collect from premiums and pay out for claims, benefits and expenses. An adjustment is taken into account for the timing (time value of money) and the (non-financial) risk of those cash flows, the so-called risk adjustment. Fulfilment cash flows must be updated at each reporting date and should be adjusted following relevant market information. The following table shows the fulfilment cash flow components.

Figure 1: Overview fulfilment cash flow component

Information about profitability

Under IFRS 17, companies should allocate contracts in profitability groups based on similar characteristics and risk management processes.

When applying the GMM or VFA approach, IFRS 17 will change profit emergence patterns through the Contractual Service Margin (CSM) and will require the immediate recognition of losses from onerous contracts. Hence, such losses will no longer be offset by profitable contracts. The CSM shows the expected profitability of a group of (re)insurance contracts, representing the unearned profit that a company will recognize in the future. Consequently, as was allowed under IFRS 4, profits are no longer are no longer recognized upfront.

Insurance performance

IFRS 17 requires a level of aggregation and profitability information per group of insurance contracts. Profits and losses follow from the reversal of the components of the insurance liability as well as from changes in expected cash flows and changes in discount rates. The profit and loss components are displayed in figure 2. 

In the profit and loss statement a distinction should be made between:
1. the insurance service result (the profit earned from providing insurance coverage) and;
2. the insurance financial results:
- investment income from managing financial assets; and
- insurance finance expenses from insurance obligations.
- impact of changes in estimates  

Figure 2: Overview of profit and loss components

Reinsurance accounting

Under IFRS 17, reinsurance contracts held are accounted for as separate/stand-alone contracts that are independent of the accounting for the underlying (direct) insurance contracts. Separate accounting is necessary to truly reflect the economics of an entity’s rights and obligations, according to the IASB . Reinsurance accounting brings its own challenges when it comes to measurement under IFRS 17.

Impact

The impact of the introduction of IFRS 17 could differ per jurisdiction. Nevertheless, below we aim to outline the general tax and tax accounting considerations related to the implementation of IFRS 17.

Tax department considerations

Since the introduction of IFRS 17 has a significant impact on
finance and risk management departments, tax departments could benefit from
early involvement with the IFRS 17 implementation. For example, to ensure that
relevant data continues to be available and that tax departments benefit from investments made in IT and process optimization.   

In order to determine the IFRS 17 impact on tax, at the very least
the following should be considered:

  • IFRS 17 causes changes in data requirements and data availability. Therefore, in safeguarding a proper audit trail, tax departments should consider the changes needed to ensure that all the data required is readily available and documented. A tax control framework could be beneficial to manage these requirements. 
  • Does IFRS 17 result in changes in the tax treatment in relevant jurisdictions?
  • Will IFRS 17 be followed for tax purposes? – Here it is important to also understand the impact per group of (re)insurance contracts and per product. Will the accounting changes impact the deferred tax positions? Could this impact your Solvency II position?
  • Is your transfer pricing affected? 
  • Will you be able to track your tax in P&L vs OCI?
  • Do you need to change your tax (accounting) system to facilitate for IFRS 17?

In many jurisdictions the tax treatment changes following IFRS 17 may still be
unclear. 

The Dutch insurance market

To date, the Dutch government has not announced any changes in the tax treatment of insurance contracts following the introduction of IFRS 17. Nor has the Tax Administration taken a position on whether IFRS 17 can be followed for
Dutch tax purposes.

Under the current system one could consider whether the different components of the insurance result could be followed for Dutch tax purposes. Considerations could include:

  • Replacing the upfronting of profit by distribution over the coverage period of the insurance contract.
  • Can CSM related interest expenses and future cash flows be followed for tax purposes? For IFRS 16 (leases) this was an argument not to allow the treatment, as this was not in line with the matching principle.  
  • Based on the Decree of the Dutch Tax Administration, life insurance contracts should be based on historical assumptions. Will IFRS 17 also lead to changes to this approach in the Decree?

 

In the commentary on the implementation of IFRS 16 (leases), the Dutch State Secretary emphasizes that the commercial treatment can be followed for tax purposes, provided it is in line with sound business principles. He considered that fees for the use of an asset are taken into account in the year in which they become due, i.e. that as annual costs the lessee may take into account what he owed contractually (nominally) for using the asset in the relevant year. Generally, IFRS 17 seems to allocate the profits and losses in line with the matching principle to which the State Secretary refers in relation to IFRS 16. Although, this is questionable for some components as previously discussed in respect of IFRS 16.

Tax transition impact

If, when adopting IFRS 17, companies expect to recognize an impact on retained earnings that could also impact future profits, a company should consider whether for tax purposes such adjustment should go through the P&L. This is especially relevant for the jurisdictions in which tax follows statutory accounting, which is the case in several jurisdictions. The question is whether tax authorities in different jurisdictions will put in place specific rules.

 

Other comprehensive income

Under IFRS 17, companies can elect for discount rate changes to be recognized in the income statement or a split can be made between recognition in the income statement and recognition in other comprehensive income. This might affect taxes, especially in jurisdictions that measure taxable profit based on the income statement, and do not take into account the other comprehensive income.

 

Transfer pricing impact

In terms of a longer term transfer pricing perspective, IFRS 17 will provide better data to ensure that intercompany (re)insurance transactions are at arm’s length. However, in the near future the immediate implementation will likely cause volatility in comparing insurers’ financial indicators due to the recognition of the changes to financial risk assumptions. Noting that the changes caused by IFRS 17 will modify traditional indicators and have an impact on the ‘level’ of equity (particularly with the grouping of contracts and CSM). In addition, given the grouping of contracts, the comparability of transfer pricing methods such as CUPs could leave these methods susceptible to challenges. Considering the greater insight into onerous contracts, this particularly applies to the commercial rationale of some reinsurance arrangements.

All intercompany (re)insurance arrangements should be reviewed and a relevant transfer pricing analysis should be performed to ensure the arm’s length nature of the transactions. Given the consistency and transparency created by IFRS 17 and recent guidance released by the Organization for Economic Co-operation and Development (“OECD”), tax authorities are likely to increase their focus on these arrangements.   

Impact IFRS 17 on indirect taxation

The IFRS 17 changes will not only impact the determination and taxation of profit and losses. It could impact indirect taxes (such as VAT and Insurance Premium Tax) as well. For example, determining an insurer’s (Dutch) VAT recovery position is technically based on the turnover figures (the so-called pro rata calculation). In ensuring that the calculation uses the total and correct dataset, the pro rata calculation is often based on or reconciled with the amount of Gross Written Premium (“GWP”) as included in the annual accounts. Under IFRS 17, GWP will no longer be included in the annual accounts. Hence, tax departments should anticipate on these changes to retain the possibility to determine and reconcile the pro rata calculation. Furthermore, it should also be determined whether the transition to IFRS 17 will generate (non-operational) results. Such results should be eliminated from the pro rata calculation. 

 

Dutch GAAP 

We are awaiting the DASB’s view on whether under Dutch GAAP IFRS 17 can be followed. Nevertheless, IFRS 17 could change the impact on the calculation of equity under Solvency II.

Action required

Tax departments should proactively join the process of the transition to IFRS 17.


The transition to IFRS 17 requires the tax department to survey relevant jurisdictions to determine as to whether and how IFRS 17 impacts the tax computation. Finally, based upon the local tax treatment, the tax accounting impact should be determined.

Deloitte has a global network of (re)insurance (tax) specialists who are subject matter experts. In relation to the challenges above we are able to guide you and deliver support with:

  • Outlining the tax IFRS 17 transition plan and strategic view;
  • Utilize our global presence to your benefit by assessing the impact in your relevant jurisdictions; 
  • Model the impact on your deferred tax positions, including potential Solvency II aspects; 
  • Embrace this disruptive change to shape tax departments of the future with Deloitte’s technology enabled solutions, which will help to embrace emerging technologies; 
  • Provide you with local and international knowledge, resources or strategic input.   
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