By: Balaji Mysore Vijayasarathy, Senior Consultant, LTIMindtree

In this age of a globalized economy and business beyond national borders, an organization often comes across challenges on being coordinated with their counterparts on aspects like regulations, byelaws, and accounting standards. This is primarily because each nation would have their own way of handling events and transactions in their books. The insurance/reinsurance industry is not an exception to this.

Reinsurance, as such, deals with complex calculations and integration when compared to insurance contracts. This complexity escalates when these companies have branches/subsidiaries in various countries. When each of these subsidiaries prepare a financial statement on the basis of respective national standards, i.e., the difference in accounting treatments will lead to difficulties in arriving at the company’s overall performance for a period.

Hence, in order to overcome this challenge, the implementation of a global accounting standard will help in maintaining consistency, stability, and reduces the complexity in understanding the information exchanged by organizations. Accounting standards are typically set of rules or principles that help us in updating, handling, presenting and disclosing accounting transactions in a pre-defined manner.

The implementation of a common standard will enhance the quality and comparability of financial information. This will primarily help investors and others in the stakeholder community in getting better clarity about the company’s performance, apart from strengthening the respective organization’s management through quicker and efficient decision-making.

International Financial Reporting Standards (IFRS)

IFRS 17 is scheduled to be rolled out for insurance/reinsurance by January 2023. Prior to this, IFRS 4 (since 2004) was in place as a standard or solution which provided for various accounting practices within insurance contracts. However, this was only an interim rollout until the International Accounting Standards Board finalized IFRS 17. IFRS 17 provides for more concrete principles in recognizing, measuring, and disclosing financials of insurance/reinsurance companies.

IFRS 17 is the set of standards or rules relevant to insurance/reinsurance contracts. Insurance companies deal in two important areas viz. accepting risk in return for a premium and investments. Hence, the financials generally will have details about both these elements. Apart from these, the financial statements will also furnish details about the reinsurance and/or retrocession contracts.

A few highlights of IFRS 17:

• Identifies the revenue, expenses, and other transactions specific to insurance contracts only.
• Profit is recognized by services provided, which is the insurance coverage amount. Hence, for an insurance policy with a constant sum insured for its duration, the profits are expected to emerge evenly.
• Likewise, investments and their performance are separated from insurance contracts. Provides information on investment revenue exclusively.
• Cash flows: future cash flow estimates can be relatively more precise (from premium claims and expenses)
• Reinsurance contracts are distinguished from the respective insurance contracts.
• In a large group, profit or loss from contracts of a specific entity is acknowledged.

These codes of IFRS 17 will certainly bring in more clarity to all users in assessing the financial position, performance, and solvency status of the organization or entity.

Simplification of reporting, reduced complexity, alignment of internal and external views, improved business coordination and optimization of financial reporting position are a few benefits of IFRS 17.

Impact during Transition

Value chain: IFRS will have a fair amount of impact on everyone involved in the value chain. It is crucial for all the divisions to understand the concepts and the differences. Be it client markets, underwriters, stakeholders, investors, finance teams, IT, actuaries, or operations; everyone should be aware of the changes that IFRS brings in.

Investors/stakeholder: the implementation of IFRS will change to the way financials are presented and read or perceived by the stakeholder community. In order to avoid any gap in the way information is handled or analyzed, substantial time has to be invested by the respective managers to ensure that everyone involved are educated or trained accordingly.

IT infrastructure: changes in accounting standards will also require changes to accounting software used by the organization. These could be in the form of backend changes to the rules sets, addition and deletion of some features, addressing relevant impact on upstream and downstream systems, etc. To ensure a smooth transference, the technical team should be well educated on the IFRS implications across different applications, so that they will be able to analyze the impact of the changes to be made.

Conclusion

Implementing IFRS 17 will have a significant influence on financial reporting, which will primarily help in overcoming the current challenge of different accounting treatments. In order to ensure successful roll out of this change, it is crucial that sufficient time, resources, and consideration is provided during the transition.

For more information, please refer to the links below.

Reference links:

1. https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/
2. https://www.pwc.co.uk/audit-assurance/assets/pdf/ifrs17-will-affect-how-reinsurers-conduct-business.pdf
3. https://www.iii.org/article/background-on-insurance-accounting
4. https://www.thebusinessofrisk.com/?p=4718#sthash.kEByJ51d.dpbs
5. gx-audit-ifrs-17-implementation-guide.pdf (deloitte.com)