IFRS 17: Accounting for Insurance Contracts

Key principles of IFRS 17

• an insurance contract is a contract under which an entity accepts significant insurance risk;
• contracts are divided into groups for recognition and measurement;
• measurement of a group: the present value of future cash flows adjusted for risk, plus the contractual service margin (CSM) — unearned profit;
• profit is recognised as services are provided, while a loss on an onerous group is recognised immediately;
• a simplified approach (premium allocation approach, PAA) is available for simple contracts;
• the standard applies to periods beginning on or after 1 January 2023.

Who needs it in Uzbekistan

IFRS accounting is mandatory for public interest entities — from 1 January of the year following the year of their inclusion in the Register (Presidential Resolution PP-282) — and for companies that have voluntarily switched to IFRS.

Scope

The standard applies to insurance contracts a company issues, as well as to certain contracts with elements of insurance risk — regardless of whether the company is called an insurer.

The key criterion is the acceptance of significant insurance risk: an obligation to compensate the policyholder for a loss if an uncertain future event occurs.

How the liability is measured

The liability under a contract is measured as the present value of expected future cash flows adjusted for non-financial risk, plus a margin representing profit not yet earned.

This structure makes it possible to split profit into a recognised and a deferred part, rather than reporting all of it when the contract is signed.

• expected future cash flows
• discounting
• risk adjustment for non-financial risk
• contractual service margin

Grouping of contracts

Contracts are grouped by portfolio, year of issue and level of profitability. Onerous contracts are separated out, and the loss on them is recognised immediately.

In practice this is one of the most labour-intensive requirements: it calls for highly granular data.

Practical difficulties

The standard requires large volumes of data, actuarial calculations and changes to IT systems. For many companies the main challenge is not the methodology but collecting source data at the required level of detail.

We help companies work through the application of international standards, including preparation of financial statements and disclosures.

Who it applies to in practice

The standard affects entities that enter into insurance contracts — primarily insurance companies. But those who analyse their financial statements — investors, banks, partners — also encounter it.

For other companies the practical interest is usually limited: what matters is understanding the logic so as to read a counterparty's or a group's financial statements correctly.

What changes in the approach

The core idea is to report insurance contract liabilities on the basis of estimated future cash flows and the related uncertainty, and to recognise revenue as the service is provided.

As a result, the structure of the statement of financial performance changes: the separation between the insurance result and the result from the investment component becomes more visible.

• measuring liabilities on the basis of future cash flows
• reflecting uncertainty and risk
• recognising revenue as the service is provided
• presenting results separately

Why implementation turns out to be difficult

The main difficulty is organisational rather than methodological: it requires data that were never collected before and cooperation between accounting, the actuarial function and IT.

A separate task is comparability of periods. On transition, comparative information has to be revised and the reasons for the changes explained to users of the financial statements.

How we help

We assess whether the standard affects your business, help design accounting decisions and prepare notes to the financial statements, and check that the chosen approaches are applied correctly.

Standards are updated from time to time, so the current version and the application rules need to be verified — we do this as part of our work.

Where to start

A sensible first step is an inventory of contracts and data: which of them fall within the scope of the standard and whether there is enough information for the required estimates.

This stage alone shows the bulk of the work, because what is usually missing is data, not an understanding of the methodology.