The effective date of IFRS 17 is coming close and My Best CFO Team decided to go over IFRS 17 to facilitate its application.
The revised IFRS 17 was published in mid-2020 with amendments in key areas of the standard including a deferred effective date of 1 January 2023.
Transition reliefs – investment contracts with discretionary participation features (Paragraphs C9 and C21)
Entities will be permitted to determine whether a contract meets the definition of an ‘investment contract with discretionary participation features’ using information available at the date of transition where information at inception or initial recognition is not available.
Transition reliefs – reinsurance contracts held (Paragraph C15A)
Entities should assume that a reinsurance contract held was acquired after the underlying insurance contracts were issued in situations where the entity does not have reasonable and supportable information to determine the date of acquisition of the reinsurance contract.
This means the reinsurance contract held would not have a loss-recovery component representing the recovery of expected initial losses on the related underlying contracts.
Transition reliefs – interim financial statements (Paragraph B137)
This applies for entities that make an accounting policy choice not to change the treatment of past accounting estimates made in previous interim financial statements. Under the modified retrospective approach, if the entity does not have reasonable and supportable information to apply the accounting policy choice retrospectively, the entities will determine:
the contractual service margin (CSM),
the loss component, and
amounts related to insurance finance income or expenses
at the date of transition as if the entity had not prepared any interim financial statements before the date of transition.
Distinct investment components (Paragraph 11)
Entities will apply IFRS 17 to distinct investment components that meet the definition of an investment contract with discretionary participation features.
Recognition of contracts (Paragraph 28 and to retain, unchanged, paragraph 22)
Entities will include only contracts that meet the recognition criteria of paragraph 25 of IFRS 17 in recognizing a group of insurance contracts at a reporting date. The recognition date of a contract may be different from the issue date.
Insurance finance income or expenses (Paragraph B128c)
Changes in the measurement of a group of insurance contracts caused by changes in the value of underlying items (excluding additions and withdrawals) are changes arising from the effect of the time value of money and financial risk.
Definition of investment component (Appendix A)
To finalize the definition of an investment component referring to a repayment in all circumstances and clarify that policy loans are not necessarily investment components.
Adjustments to CSM under paragraph B96(c) (Paragraph B96(c))
To clarify that, for insurance contracts without direct participation features, the CSM is not adjusted for changes in fulfilment cash flows arising from differences that relate to the time value of money and assumptions that relate to financial risk between:
any loan to a policyholder expected to become payable in the period; and
the actual loan to the policyholder that becomes payable in the period.
Policyholder loans and revenue (Paragraph B123(a))
Changes to the liability for remaining coverage due to changes in cash flows from loans to policyholders do not give rise to insurance revenue.
Experience adjustments for premium receipts (Paragraphs 106(a) and B124)
To specify that an entity should present experience adjustments for premium receipts that relate to current or past service as insurance revenue.
Adjustments to CSM under paragraph B96(d) (Paragraph B96(d))
To clarify that, for insurance contracts without direct participation features, if an entity chooses to disaggregate the change in the risk adjustment for non-financial risk between insurance service result and insurance finance income or expenses, the entity should adjust the CSM only for the changes related to non-financial risk, measured at the discount rates determined on initial recognition.
Variable Fee Approach (VFA) eligibility test (Paragraph B107)
Confirmed that the eligibility test for the VFA is to be performed on a contract by contract basis.
Consequential amendment to IFRS 3 Business Combinations (IFRS 3)
To clarify that an entity can continue to classify insurance contracts acquired through a business combination that occurred before the date of initial application of IFRS 17 (and only those business combinations) based on the contractual terms and other factors at the inception of the contract, rather than at the date of acquisition.
Consequential amendment to IFRS 9 Financial Instruments (Paragraph 2.1 of IFRS 9)
Financial guarantee contracts issued (if not in scope of IFRS 17) are in the scope of IFRS 9, rather than financial guarantee contracts issued or held, as previously specified in the ED.
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Transition to IFRS 17 will be challenging and time-consuming and preparers should move ahead with executing their transition plans.
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