The insurance companies have to prepare financial statements as per IFRS 17 for the financial years starting on or after 01/01/2023. Measurement of the insurance contracts under IFRS 17 is significantly different from current practice. Complexities may arise with interim financial statements and annual financial statements of the Insurers.
IAS 34 Interim Financial Reporting states that the frequency of an entity’s reporting should not affect the measurement of its annual results. However, paragraph B137 of IFRS 17 (Original version) requires that an entity does 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.
The recent amendment of IFRS 17 gives an accounting policy choice to change the treatment of accounting estimates made in interim financial statements when those results are subsequently included in next interim or annual financial statements. As a result, Insurers may make the accounting policy choice as per their requirement and different accounting policy will result different outcome which reduces the comparability.
Below example simplifies the issue with different accounting policy choices.
Opening CSM for a certain Portfolio of contracts is $ 1,200 and this will be released over 3 years. In Q4 Insurers expect additional claims amounting to $ 720 (Cash outflow) to be served in year 3.
Insurer A – Opted to not to revise or adjust the treatment of accounting estimates made in prior interim periods in subsequent interim periods and in the entire annual period.
Insurer B – Opted to change the treatment of accounting estimates made in previous interim financial statements when applying IFRS 17 in subsequent interim financial statements or annual reporting.
Insurer C – Prepares only annual Financial statements.
Below table shows differences in CSM (Unearned profit) releases with three entities with different accounting policy choice.
|Opening CSM||2023 Q1||2023 Q2||2023 Q3||2023 Q4||Year 2023||Closing CSM|
Amended IFRS 17 to permit entities an accounting policy choice as to whether an entity changes the treatment of changes in estimates arising from IFRS 17 in previous interim financial statements when IFRS 17 is applied in subsequent interim or annual financial statements. Therefore, an entity’s annual financial statement may or may not be the sum of its previously issued interim financial statements, depending on its accounting policy choice.
Since IFRS 17’s requirements may affect the classification of changes in estimates as amounts that affect CSM or are recognised in profit or loss, the timing of financial statement preparation may affect the figures reported. Therefore, an entity that prepares interim financial statements in a year may have different annual results than an identical entity that does not prepare interim financial statements.
Comparability of financial statements within insurance Industry will be a challenge. Some Insurer may choice to change their treatment of accounting estimates and others may not.
Teran Prasanna ACA (ICAEW-UK), FCA, CPA, Bsc (Accounting)