15.4 Reporting the contractual service margin in interim financial
statements
It is observed in the Basis for Conclusions that requiring the contractual service margin
to be adjusted for changes in estimates of the fulfilment cash flows but not for
experience adjustments has the consequence that the accounting depends on the timing
of a reporting date. [IFRS 17.BC236]. Therefore, to avoid IAS 34 – Interim Financial
Reporting – being interpreted as requiring the recalculation of previously reported
amounts, an entity should not change the treatment of accounting estimates made in
previous interim financial statements when applying IFRS 17 in subsequent interim
financial statements or in the annual reporting period. [IFRS 17.B137].
The implication of this is that entities with different interim reporting periods are likely to
report different results for similar transactions. Entities may welcome this exception as a
simplification that allows them to maintain a single contractual service margin for interim
and annual reporting. However, the consequence is that entities with different interim
reporting periods, but are equal in all other aspects, are likely to report different results.
Insurance contracts (IFRS 17) 4577
Furthermore, for subsidiaries issuing their own IFRS financial statements, differences with
the numbers reported for consolidation purposes are likely to emerge if the frequency of
the reporting of a subsidiary’s own financial statements differs from the reporting
frequency of the consolidated accounts of the group.
The effect of this requirement is illustrated in the following example:
Example 52.51: The contractual service margin and interim reporting
An entity with an annual reporting period ending on 31 December publishes half-yearly interim financial statements.
At 31 December 20X0, the entity has issued a group of insurance contracts with a CSM of £1,200 and an
expected remaining coverage period of two years. The entity expects to provide coverage evenly over the
remaining coverage period, and expects to incur claims in H2 20X1 of £300.
At the end of H1 20X1, the entity increases its estimate of claims to be incurred in H2 of 20X1 by £200 to
£500. The entity adjusts (reduces) the related contractual service margin by £200 and reduces the contractual
service margin by £250 for services provided in H1 (£1,200 – £200)/4. At the end of H1 20X1, the entity
carries forward a contractual service margin of £750.
The entity incurs claims in H2 20X1 of £300 (as originally expected) and, consequently, recognises a
favourable experience adjustment in profit or loss (i.e. a credit to insurance service expenses) of £200 in its
H2 interim financial statements.
The entity releases £250 from the contractual service margin to profit or loss (insurance revenue) in H2 and
carries forward a CSM of £500 (£750 – £250) at 31 December 20X1 in the H2 20X1 interim as well as annual
financial statements.
In summary, in 20X1 the entity recognises revenue of £500, a positive experience adjustment in profit or loss
of £200 (i.e. a total credit to profit and loss of £700) and carries forward a contractual service margin of £500
in both its interim financial statements for H2 20X1, as well as its annual financial statements for that year.
Alternatively, if the entity did not prepare interim financial statements and prepared only annual financial
statements, the impact on the annual financial statements for the identical fact pattern described above is as follows:
• There is no experience adjustment in the year – claims in 20X1 are as expected at 31 December 20X0.
• The entity would release £600 from the contractual service margin to profit or loss in the calendar
year 20X1 and would carry forward a contractual service margin of £600 (£1,200 brought forward –
£600 release to P&L = £600).
Therefore, if the entity prepared both half-year interim financial statements and annual financial statements
it would recognise insurance revenue of £600 in 20X1 and carry forward a contractual service margin of £600
at 31 December 20X1 if it prepared annual financial statements, instead of recognising insurance revenue of
£500 and carrying forward a contractual service margin of £500.
The example above assumes there are no other changes in expectations and ignores
accretion of interest for simplicity.
15.5 Changes in accounting policies and accounting estimates
IFRS 17 has no specific requirements in respect of changes in accounting policies and
changes in accounting estimates except those for insurance contracts with direct
participation features which are required to change the way they account for
disaggregated finance and income when the underlying items are no longer held by
those contracts – see 15.3.3 above.
Consequently, any changes in accounting policies and changes in accounting estimates
should be accounted for in accordance with IAS 8. The requirements of IAS 8 in respect
of changes in accounting policies and accounting estimates are discussed in Chapter 3
at 4.4 and 4.5 respectively.
4578 Chapter 52
16 DISCLOSURE
One of the main objectives of IFRS 17 is to establish principles for the disclosure of
insurance contracts which gives a basis for users of the financial statements to assess the
effect that insurance contracts have on an entity’s financial position, financial
performance and cash flows. [IFRS 17.1].
Hence, the objective of the disclosure requirements is for an entity to disclose
information in the notes that, together with the information provided in the statement
of financial position, statement(s) of financial performance and statement of cash flows,
gives a basis for users of financial statements to assess the effect that contracts within
the scope of IFRS 17 have on the entity’s financial position, financial performance and
cash flows. To achieve that objective, an entity should disclose qualitative and
quantitative information about: [IFRS 17.93]
• the amounts recognised in its financial statements for contracts within the scope
of IFRS 17 (see 16.1 below);
• the significant judgements, and changes in those judgements, made when applying
IFRS 17 (see 16.2 below); and
• the nature and extent of the risks from contracts within the scope of IFRS 17
(see 16.3 below).
The disclosure objective is supplemented with some specific disclosure requirements
designed to help the entity satisfy this objective. By specifying the objective of the
disclosures, the Board aims to ensure that entities provide the information that is most
relevant for their circumstances and to emphasise the importance of communication to
users of financial statements rather than compliance with detailed and prescriptive
disclosure requirements. In situations in which the information provided to meet the
specific disclosure requirements is not sufficient to meet the disclosure objective, the
entity is required to disclose additional information necessary to achieve that objective.
[IFRS 17.BC347].
The Board used the disclosure requirements in IFRS 4, including the disclosure
requirements in IFRS 7 that are incorporated in IFRS 4 by cross-reference, as a basis
for the requirements in IFRS 17. This
is because stakeholders have indicated that such
disclosures provide useful information to users of financial statements for
understanding the amount, timing and uncertainty of future cash flows from insurance
contracts. The disclosure requirements brought forward from IFRS 4 include
information about significant judgements in applying the standard as well as most of
the disclosures about the nature and extent of risks that arise from insurance
contracts. [IFRS 17.BC348]. In addition, when developing IFRS 17, the Board identified
key items it views as critical to understanding the financial statements of entities
issuing insurance contracts, in the light of the requirement to update the measurement
of insurance contracts at each reporting date. Consequently, additional disclosures
have been added requiring: [IFRS 17.BC349]
• reconciliations of opening to closing balances of the various components of the
liability for remaining coverage and the liability for incurred claims;
• an analysis of insurance revenue;
Insurance contracts (IFRS 17) 4579
• information about initial recognition of insurance contracts in the statement of
financial position;
• an explanation of when an entity expects to recognise the contractual service
margin remaining at the end of the reporting period in profit or loss;
• an explanation of the total amount of insurance finance income or expenses in
profit or loss and the composition and fair value of underlying items for contracts
with direct participation features;
• information about the entity’s approach to determining various inputs into the
fulfilment cash flows;
• the confidence level used to determine the risk adjustment for non-financial risk;
• information about yield curves used to discount cash flows that do not vary based
on returns from underlying items; and
• information about the effect of the regulatory framework in which the entity operates.
The result of this is that the disclosure requirements of IFRS 17 are likely to be more
extensive compared to the requirements of IFRS 4. They comprise forty paragraphs
of the standard and many of these disclosures will not have previously been applied
by insurance entities. In summary, complying with the disclosure requirements will
be a challenge.
IFRS 17 requires a reporting entity to consider the level of detail necessary to satisfy the
disclosure objective and how much emphasis to place on each of the various
requirements. Preparers are informed that if the mandatory disclosures required are not
enough to meet the disclosure objective, additional information should be disclosed as
necessary to meet that objective. [IFRS 17.94].
An entity should aggregate or disaggregate information so that useful information is not
obscured either by the inclusion of a large amount of insignificant detail or by the
aggregation of items that have different characteristics. [IFRS 17.95].
Preparers are also reminded of the requirements in IAS 1 relating to materiality and
aggregation of information (see Chapter 3 at 4.1.5.A). IFRS 17 states that examples of
aggregation bases that might be appropriate for information disclosed about insurance
contracts are: [IFRS 17.96]
• type of contract (for example, major product lines);
• geographical area (for example, country or region); or
• reportable segment, as defined in IFRS 8 – Operating Segments.
16.1 Explanation of recognised amounts
The first part of the disclosure objective established by the standard is that an entity
should disclosure qualitative and quantitative information about the amounts
recognised in its financial statements for contracts within its scope. [IFRS 17.93].
The principal method by which the disclosure objective is achieved is by the disclosure
of reconciliations that show how the net carrying amounts of contracts within the scope
of IFRS 17 changed during the period because of cash flows and income and expenses
recognised in the statement(s) of financial performance. Separate reconciliations should
4580 Chapter 52
be disclosed for insurance contracts issued and reinsurance contracts held. An entity
should adapt the requirements of the reconciliations described below to reflect the
features of reinsurance contracts held that differ from insurance contracts issued; for
example, the generation of expenses or reduction in expenses rather than revenue.
[IFRS 17.98].
Enough information should be provided in the reconciliations to enable users of
financial statements to identify changes from cash flows and amounts that are
recognised in the statement(s) of financial performance. To comply with this
requirement, an entity should: [IFRS 17.99]
• disclose, in a table, the reconciliations set out at 16.1.1 to 16.1.2 below; and
• for each reconciliation, present the net carrying amounts at the beginning and at
the end of the period, disaggregated into a total for groups of contracts that are
assets and a total for groups of contracts that are liabilities, that equal the amounts
presented in the statement of financial position as set out at 14 above.
The objective of the reconciliations detailed in 16.1.1 to 16.1.2 below is to provide
different types of information about the insurance service result. [IFRS 17.102].
16.1.1
Reconciliations required for contracts applying the general model
These reconciliations are required for all contracts other than those to which the premium
allocation approach is applied including contracts with direct participation features.
Firstly, an entity must provide overall reconciliations from the opening to the closing
balances separately for each of: [IFRS 17.100]
• the net liabilities (or assets) for the remaining coverage component, excluding any
loss component;
• any loss component (see 8.8 above); and
• the liabilities for incurred claims.
Within the overall reconciliations above, an entity should separately disclose each of
the following amounts related to insurance services, if applicable: [IFRS 17.103]
• insurance revenue;
• insurance service expenses, showing separately:
• incurred claims (excluding investment components) and other incurred
insurance service expenses;
• amortisation of insurance acquisition cash flows;
• changes that relate to past service, i.e. changes in fulfilment cash flows relating
to the liability for incurred claims; and
• changes that relate to future service, i.e. losses on onerous groups of contracts
and reversals of such losses; and
• investment components excluded from insurance revenue and insurance service
expenses.
Below is an example of this overall reconciliation, based on an illustrative disclosure in
the IASB’s IFRS 17 Effects Analysis.
Insurance contracts (IFRS 17) 4581
Figure 52.2
Movements in insurance contract liabilities analysed between the
liability for remaining coverage and the liabilities for incurred claims.
Liability for remaining coverage
Excluding
Onerous
Liabilities
Total
one
rous
contracts
for incurred
contracts
component
claims
component
Insurance contract liabilities 2020
161,938
15,859
1,021
178,818
Insurance revenue
(9,856)
–
– (9,856)
Insurance services expenses
1,259
(623)
7,985
8,621
Incurred claims and other
(840)
7,945 7,105
expenses
Acquisition
expenses
1,259
–
1,259
Changes that relate to future
–
217
– 217
service: loss on onerous
contracts and reversals of those
losses
Changes that relate to past
–
–
40 1,259
service: changes to liability for
incurred claims
Investment components
(6,465)
–
6,465 –
Insurance service result
(15,062)
(623)
14,450
(1,235)
Insurance finance expenses
8,393
860
55
9,308
Total changes in the statement of
(6,669)
237
14,505 8,073
comprehensive income
Cash flows
Premiums
received
33,570
–
– 33,570
Claims, benefits and other
(14,336) (14,336)
expenses paid
Acquisition cash flows paid
(401)
–
– (401)
Total cash flows
33,169
–
(14,336) 18,833
Insurance contract liabilities 2021
188,438
16,096
1,190
205,724
Secondly, an entity should also disclose reconciliations from the opening to the closing
balances separately for each of: [IFRS 17.101]
• the estimates of the present value of the future cash flows;
• the risk adjustment for non-financial risk; and
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 905
