The IASB has issued its new rules, considered among the most significant changes ever made to international accounting requirements.
IFRS 17 now requires all insurance contracts to be accounted for in a consistent way using current values instead of historic costs. It does away with IFRS 4, which was adopted as an interim standard in 2004 to tell companies they could account for insurance contracts following whatever national standards they’d been following up to that time.
Although the accounting changes will be most felt by the 450 listed insurers globally who follow IFRS, IFRS 17 affects the reporting of $13 trillion in assets globally.
IFRS 17 replaces outdated, jurisdiction-specific approaches that gave users of financial statements no real basis for comparison. The new standard requires any company that writes insurance contracts to measure those contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty related to the contracts. That means entities will provide consistently produced reporting about a company’s financial position and risk, the IASB says.
The new standard requires companies to recognize earnings as they deliver insurance services rather than as they receive premiums and to provide information about profits expected in the future. That will lead to metrics that will enable users of financial statements to better evaluate performance and how it changes over time.
Under GAAP, FASB has issued an exposure draft for a proposed change to U.S. standards around insurance contract reporting as well. FASB issued the proposal in September 2016 and is in the process of deliberating changes. The board held a roundtable in April to hear views publicly as well.
While the change for international insurers is expected to be significant, prompting the IASB to give companies more than three years to prepare for adoption, the change under U.S. GAAP is not expected to be nearly as monumental. That’s because companies already had rules under GAAP that didn’t require an complete overhaul, but more of a targeted tweaking.
The GAAP proposal is focused on updating assumptions used to measure liabilities, requiring cash flows to be discounted according to a particular yield, requiring more use of fair value, and simplifying the amortization of deferred acquisition costs, not to mention improving disclosures.
Those proposed changes are expected to have their greatest effect on a particular portion of insurance contracts called participating contracts where a policy holder participates in an underlying pool of assets. In life insurance, that’s universal life policies.