within the scope of IFRS 15;
• the liability for a group of insurance contracts relating to incurred claims being
measured is broadly consistent with IAS 37 – Provisions, Contingent Liabilities and
Contingent Assets, except that the liability often includes an investment
component that is typically not in contracts within the scope of IAS 37.
An entity may apply a simplified measurement approach (the premium allocation
approach) to some insurance contracts. This simplified measurement approach allows
an entity to measure the amount relating to remaining service by allocating the premium
over the coverage period. [IFRS 17.IN8].
IFRS 17 will have a significant effect on many insurers as their existing accounting
policies for recognition and measurement under IFRS 4, usually derived from their local
GAAP, are likely to differ from those required by the IFRS 17. The costs involved in
implementing IFRS 17 are likely to be substantial because of the need for significant
systems development in order to capture the required information.
IFRS 17 is effective for annual accounting periods beginning on or after 1 January 2021.
Early application is permitted for entities that apply both IFRS 9 – Financial
Instruments – and IFRS 15 on or before the date of initial application.
IFRS 17’s transition provisions require a full retrospective application of the standard
unless it is impracticable, in which case entities should apply either a modified
retrospective approach or a fair value approach (see 17 below).
Following issuance of IFRS 17, the IASB created a Transition Resource Group (TRG).
The members of the TRG include financial-statement preparers and auditors with both
practical and direct knowledge of implementing IFRS 17. The TRG members work in
different countries and regions. The TRG’s purpose is to:
• provide a public forum for stakeholders to follow the discussion of questions raised
on implementation; and
• inform the IASB in order to help the IASB determine what, if any, action will be needed
to address those questions. Possible actions include providing supporting materials such
as webinars, case studies and/or referral to the Board or Interpretations Committee.
The TRG plans to meet four times in 2018 although, due to publication deadlines, only
the relevant discussions in the first two meetings are reflected in this chapter. The TRG
members’ views are non-authoritative, but entities should consider them as they
implement the new standards.
In June 2018, the IASB discussed and agreed to several proposed narrow-scope
amendments to IFRS 17. These minor changes, discussed at 18 below, are intended to
Insurance contracts (IFRS 17) 4431
ensure the wording of IFRS 17 is consistent with the decisions that the IASB made in the
development of the standard.
The views expressed in this chapter may evolve as implementation continues and additional
issues are identified. The conclusions described in our illustrations are also subject to change
as views evolve. Conclusions in seemingly similar situations may differ from those reached
in the illustrations due to differences in the underlying facts and circumstances.
2
THE OBJECTIVE, DEFINITIONS AND SCOPE OF IFRS 17
2.1
The objective of IFRS 17
The objective of IFRS 17 is to ensure that an entity provides relevant information that
faithfully represents the recognition, measurement, presentation and disclosure
principles for insurance contracts within its scope. This information gives a basis for
users of financial statements to assess the effect that insurance contracts have on the
entity’s financial position, financial performance and cash flows. [IFRS 17.1].
2.2 Definitions
The following definitions are relevant to the application of IFRS 17. [IFRS 17 Appendix A].
Figure 52.1:
IFRS 17 Definitions
Term Definition
Contractual service
A component of the carrying amount of the asset or liability for a group of
margin
insurance contracts representing the unearned profit the entity will recognise
as it provides services under the insurance contracts in the group.
Coverage period
The period during which the entity provides coverage for insured events. This
period includes the coverage that relates to all premiums within the boundary
of the insurance contract.
Experience adjustment
A difference between:
(a) for premium receipts (and any related cash flows such as insurance
acquisition cash flows and insurance premium taxes) – the estimate at the
beginning of the period of the amounts expected in the period and the
actual cash flows in the period; or
(b) for insurance service expenses (excluding insurance acquisition expenses)
– the estimate at the beginning of the period of the amounts expected to be
incurred in the period and the actual amounts incurred in the period.
Financial risk
The risk of a possible future change in one or more of a specified interest rate,
financial instrument price, commodity price, currency exchange rate, index of
prices or rates, credit rating or credit index or other variable, provided in the case
of a non-financial variable that the variable is not specific to a party to the contract.
Fulfilment cash flows
An explicit, unbiased and probability-weighted estimate (i.e. expected value)
of the present value of the future cash outflows minus the present value of the
future cash inflows that will arise as the entity fulfils insurance contracts,
including a risk adjustment for non-financial risk.
4432 Chapter 52
Term Definition
Group of insurance
A set of insurance contracts resulting from the division of a portfolio of
contracts
insurance contracts into, at a minimum, contracts written within a period of
no longer than one year and that, at initial recognition:
(a) are onerous, if any;
(b) have no significant possibility of becoming onerous subsequently, if any; or
(c) do not fall into either (a) or (b), if any.
Insurance acquisition
Cash flows arising from the costs of selling, underwriting and starting a group
cash flows
of insurance contracts that are directly attributable to the portfolio of
insurance contracts to which the group belongs. Such cash flows include cash
flows that are not directly attributable to individual contracts or groups of
insurance contracts within the portfolio.
Insurance contract
A contract under which one party (the issuer) accepts significant insurance
risk from another party (the policyholder) by agreeing to compensate the
policyholder if a specified uncertain future event (the insured event) adversely
affects the policyholder.
Insurance contract with
An insurance contract for which, at inception:
direct participation
(a) the contractual terms specify that the policyholder participates in a share
features
of a clearly identified pool of underlying items;
(b) the entity expects to pay to the policyholder an amount equa
l to a
substantial share of the fair value returns on the underlying items; and
(c) the entity expects a substantial proportion of any change in the amounts
paid to the policyholder to vary with the change in the fair value of the
underlying items.
Insurance contract
An insurance contract that is not an insurance contract with direct
without direct
participation features.
participation features
Insurance risk
Risk, other than financial risk, transferred from the holder of a contract to the issuer.
Insured event
An uncertain future event covered by an insurance contract that creates
insurance risk.
Investment component
The amounts that an insurance contract requires the entity to repay to a
policyholder even if an insured event does not occur.
Investment contract
A financial instrument that provides a particular investor with the contractual
with discretionary
right to receive, as a supplement to an amount not subject to the discretion of
participation features
the issuer, additional amounts:
(a) that are expected to be a significant portion of the total contractual benefits;
(b) the timing or amount of which are contractually at the discretion of the
issuer; and
(c) that are contractually based on:
(i) the returns on a specified pool of contracts or a specified type of contract;
(ii) realised and/or unrealised investment returns on a specified pool of
assets held by the issuer; or
(iii) the profit or loss of the entity or fund that issues the contract.
Insurance contracts (IFRS 17) 4433
Liability for incurred
An entity’s obligation to investigate and pay valid claims for insured events
claims
that have already occurred, including events that have occurred but for which
claims have not been reported, and other incurred insurance expenses.
Liability for remaining
An entity’s obligation to investigate and pay valid claims under existing
coverage
insurance contracts for insured events that have not yet occurred (i.e. the
obligation that relates to the unexpired portion of the coverage period).
Policyholder
A party that has a right to compensation under an insurance contract if an
insured event occurs.
Portfolio of insurance
Insurance contracts subject to similar risks and managed together.
contracts
Reinsurance contract
An insurance contract issued by one entity (the reinsurer) to compensate
another entity for claims arising from one or more insurance contracts issued
by that other entity (underlying contracts).
Risk adjustment for
The compensation an entity requires for bearing the uncertainty about the
non-financial risk
amount and timing of the cash flows that arises from non-financial risk as the
entity fulfils insurance contracts.
Underlying items
Items that determine some of the amounts payable to a policyholder. Underlying
items can comprise any items; for example, a reference portfolio of assets, the
net assets of the entity, or a specified subset of the net assets of the entity.
2.3 Scope
An entity should apply IFRS 17 to: [IFRS 17.3]
• insurance contracts, including reinsurance contracts, it issues;
• reinsurance contracts it holds; and
• investment contracts with discretionary participation features it issues, provided
the entity also issues insurance contracts.
IFRS 17 is clear that all references to insurance contracts throughout the standard also
apply to: [IFRS 17.4]
• reinsurance contracts held, except:
• for references to insurance contracts issued; and
• the specific requirements for reinsurance contracts held discussed at 10 below;
• investment contracts with a discretionary participation feature (DPF) as set out
above except for the reference to insurance contracts and as described at 11.3 below.
In addition, all references to insurance contracts also apply to insurance contracts
acquired by an entity in a transfer of insurance contracts or a business combination
other than reinsurance contracts held. [IFRS 17.5].
It can be seen from this that IFRS 17 applies to all insurance contracts (as defined in
IFRS 17) throughout the duration of those contracts, regardless of the type of entity
issuing the contracts. [IFRS 17.BC64]. Consistent with other IFRSs it is a transaction-based
standard. Consequently, non-insurance entities will be within its scope if they issue
contracts that meet the definition of an insurance contract.
4434 Chapter 52
The Board decided to base its approach on the type of activity rather than on the type
of the entity because: [IFRS 17.BC63]
• a robust definition of an insurer that could be applied consistently from country to
country would be difficult to create;
• entities that might meet the definition frequently have major activities in other
areas as well as in insurance, and would need to determine how and to what extent
these non-insurance activities would be accounted for in a manner similar to
insurance activities or in a manner similar to how other entities account for their
non-insurance activities; and
• if an entity that issues insurance contracts accounted for a transaction in one way
and an entity that does not issue insurance contracts accounted for the same
transaction in a different way, comparability across entities would be reduced.
Conversely, contracts that fail to meet the definition of an insurance contract are within
the scope of IFRS 9 if they meet the definition of a financial instrument (unless they
contain discretionary participation features). This will be the case even if such contracts
are regulated as insurance contracts under local legislation. Such contracts are commonly
referred to as ‘investment contracts’. If such investment contracts contain an insignificant
amount of insurance risk, that insignificant insurance risk is not within the scope of
IFRS 17 since the contract is an investment contract and not an insurance contract.
The assessment of whether a contract is an insurance contract will include an
assessment of whether the contract contains significant insurance risk (discussed at 3.2
below). In addition, even if the contract contains significant insurance risk, embedded
derivatives (discussed at 4.1 below), investment components (discussed at 4.2 below) or
goods or non-insurance services (discussed at 4.3 below) contained within the insurance
contract may need to be separated and accounted for under other standards.
Contracts within the scope of IFRS 17 are excluded from the scope of the following IFRSs
(except for specific exceptions which are discussed separately elsewhere in this chapter):
• IFRS 7 – Financial Instruments: Disclosures;
• IFRS 9 – Financial Instruments;
• IFRS 15 – Revenue from Contracts with Customers;
• IAS 32 – Financial Instruments: Presentation;
• IAS 36 – Impairment of Assets;
• IAS 37 – Provisions, Contingent Liabi
lities and Contingent Assets; and
• IAS 38 – Intangible Assets.
Contracts within the scope of IFRS 17 are also excluded from the measurement
provisions of IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations.
Contracts within the scope of IFRS 17 are not excluded from the scope of IFRS 13 – Fair
Value Measurement – which means that any reference to fair value in IFRS 17 must be
fair value as defined by IFRS 13. However, IFRS 17 does not generally require that
insurance liabilities are measured at fair value except on transition in certain
circumstances (see 17.4 below).
Insurance contracts (IFRS 17) 4435
2.3.1
Transactions not within the scope of IFRS 17
IFRS 17 does not address other aspects of accounting by insurers, such as accounting for
financial assets held by insurers and financial liabilities issued by insurers which are
within the scope of IFRS 7, IFRS 9 and IAS 32.
IFRS 17 also describes transactions to which IFRS 17 is not applied. These are primarily
transactions covered by other standards that could potentially meet the definition of an
insurance contract. This list of excluded transactions is similar to that previously
contained in IFRS 4 except for the addition of residual value guarantees provided by a
manufacturer, dealer or retailer. These transactions are as follows: [IFRS 17.7]
• warranties provided by a manufacturer, dealer or retailer in connection with the
sale of its goods or services to a customer (see 2.3.1.A below);
• employers’ assets and liabilities from employee benefit plans and retirement benefit
obligations reported by defined benefit retirement plans (see 2.3.1.B below);
• contractual rights or contractual obligations contingent on the future use of, or
right to use, a non-financial item (for example, some licence fees, royalties, variable
and other contingent lease payments and similar items) (see 2.3.1.C below);
• residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s
residual value guarantees when they are embedded in a lease (see 2.3.1.D below);
• financial guarantee contracts, unless the issuer has previously asserted explicitly
that it regards such contracts as insurance contracts and has used accounting
applicable to insurance contracts (see 2.3.1.E below);
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 877
