Accounting treatment IFRS 17

IFRS 17 requires that profit is offset with a liability, the so-called Contractual Service Margin (“CSM”). Under IFRS 17, the insurance contracts are reviewed, and a liability is calculated retrospectively of all unearned profit from the insurance contracts. This liability appears on the insurance company’s balance sheet. The CSM is gradually released over the term of the contract, so that the profit from the contract is realized by the insurer over multiple future accounting periods as it provides services under the contract. As such, the CSM represents the unearned profit that an insurer is required to defer on the issuance of insurance contracts and to recognize the profit as the services are provided in the future.

The new requirements may significantly affect the amount of insurer’s annual profit. Insurers will generally need to calculate the CSM at the transition date when they adopt the new standard, applying the new rules retrospectively with adjustments in the retained earnings. Under this retrospective approach, an insurer restates its financial statements to recognize and measure insurance contracts as if IFRS 17 has always been applicable and recognize the net difference from the old rules in equity on the transition date. The portion of profit previously recognized in retained earnings for contracts issued prior to transition, that are still unearned at the time of transition, will be included in the CSM and realized over future accounting periods.

In effect, this framework pretends that IFRS 4 never existed. The effect of IFRS 4 is completely reversed under IFRS 17. This could entail that insurance companies have already paid profit tax under IFRS 4, so they may face double taxation due to the retroactive effect of IFRS 17. The same profit could be recognized twice, under IFRS 17 and under IFRS 4. The challenge is that for each insurance contract it is necessary to consider how profit, liabilities and assets were calculated under IFRS 4. We cannot consider IFRS 4 a uniform accounting standard, since all insurance companies applied their “own” accounting practices that existed prior to their first adoption of the IFRS 4 standard.

To better illustrate the approach of IFRS 17, we would like to provide an example. Under CSM, a liability of all unearned profit from insurance contracts is placed on the insurance company’s balance sheet. Suppose insurance company A has entered into an insurance contract with customer B. Assume that Insurance Company A will receive NAf 1,000 in premium from Customer B for a term of 12 months. Under IFRS 17, a calculation is made in advance of all premiums to be received from Customer B minus deductible expenses. In short this is the unearned profit of the contract. The actuary calculates the value today of this unearned profit and this amount is posted on the insurance company’s balance sheet under liability. As customer B pays the premium of NAf 1,000, the liability is gradually reduced. We call this a movement. The movement of the liability is recorded as a profit as customer B pays. This profit (or a portion hereof) could have been also recognized under IFRS 4. As a consequence, double taxation may arise. In order to avoid this double taxation, we recommend consulting with tax professionals with great knowledge regarding IFRS 4 and IFRS 17.