The International Accounting Standards Board (IASB) maintains the International Financial Reporting Standards (IFRS), which are considered the global accounting standards. Based in London, the IASB is an independent organization that updates its standards based on global needs.
In May 2017, the IASB passed IFRS 17, which goes into effect January 1, 2021. For the first time, the standards require all international insurers to follow IASB rules. This change deviates from and replaces IFRS 4, according to PricewaterhouseCoopers (PwC). It deviates in terms of insurance contracts and could have a major impact on accounting professionals — especially those who work for multinational companies or in other countries.
IFRS 17 Could Impact Multinational Insurance Companies
Although IFRS 17 does not directly impact the United States, it could affect accounting professionals who work for U.S. companies that do business with other countries. According to an Ernst & Young (EY) special report, IFRS 17’s scope includes all types of insurance contracts, from life and auto to home and health, as well as reinsurance and direct insurance.
According to EY, the IFRS 17 changes require insurance providers to maintain a current balance sheet that measures insurance contract liabilities as well as a statement of profit over the period covered. The changes also demand that insurance companies provide estimates of future cash flow value among other records.
Accounting professionals who might have to learn and follow the IFRS 17 guidelines, which include abiding by all IASB rules, may want to advance their education. A master’s in accounting, for instance, could help provide professionals with more insights into global accounting as well as skills for dealing with international insurance contracts.
The IASB Hopes to Inspire Transparency in the Insurance Industry
While the IASB has identified several reasons for developing IFRS 17, transparency might prove most significant. Writing for Business Insider, Angela Tan reports that the IASB planned some version of these changes for 20 years or more and that the IASB wants to enforce more transparency in the insurance industry.
In interviews with Tan, insurance professionals express support for IFRS 17, citing renewed transparency as one of the most important potential benefits. Deloitte global IFRS insurance leader Francesco Nagari, for instance, admits that IFRS 17 will take effort to implement, but asserts that an “international accounting language” could allow consumers, investors, and other interested parties to more effectively compare insurance products across different countries.
Raj Juta, also from Deloitte, urges insurers to start implementing IASB rules as soon as possible. Juta suggests that waiting until the changes officially go into effect could result in confusion and chaos within insurance companies and that accounting professionals might find themselves ill-equipped to keep up with the demands placed upon them.
Multiple Levels of Granularity Could Cause More Work for Accountants
Accountants who work in the insurance industry might discover that the requirements imposed by the IASB demand significant work when it comes to dividing portfolios. In an article for The Actuary, Laura Barella and Alice Boreman note that companies might choose simplification options that apply to certain conditions, but that levels of granularity could complicate matters.
According to Barella and Boreman, IFRS 17 has created certain rules for applying recognition and measurement principles to portfolios. However, the authors assert that individual insurance companies might have to divide portfolios further in-house to compensate for profit- and loss-making portfolios. Under the new rules, one will not offset the other, so accountants in insurance firms might face more granular differentiation between and within specific portfolios.
Deloitte defines portfolios as “contracts that are subject to similar risks and managed together.” According to Deloitte, when contracts in the same portfolio might get grouped differently based on local laws or regulations, insurers can still group them together for the purposes of identifying a portfolio.
Several Factors Make Up New Measurement Model
In addition to the granularity issues that accountants and other insurance professionals might face, diverse measurement models could complicate insurance accounting. A PwC report reveals that, under IFRS 17, insurers must use the prescribed measurement model every reporting period. The measurement “building blocks” include the following:
● Discounted cash flows
● Probability-weighted cash flows
● Risk adjustment
● Contractual service margin (CSM)
Insurers must also separate their contracts into three categories:
● Contracts that are onerous
● Contracts that carry no risk of becoming onerous
● Contracts that don’t apply to either of the first two categories
Additionally, according to PwC, insurers can choose an accounting policy based on their specific needs. Insurers that fall under the IASB umbrella will have to disclose information concerning judgments, risks, and other influencing factors that might impact their insurance requirements. PwC reveals that IFRS 17 has created broader, more detailed disclosure requirements than the ones IFRS 4 imposed.
Profits and Revenues May Become Clearer Under IFRS 17
Despite the complications that might arise from IFRS 17’s implementation, the new regulations could also result in a host of benefits, including more clarity with regard to profits and revenues. Writing for the South China Morning Post, columnist Alun John asserts that, by requiring insurers to follow IASB standards, several groups of people might enjoy greater clarity when comparing insurance products, including the following:
● Insured consumers and potential customers: The global accounting standards might help consumers make more informed decisions about their insurance purchases, especially when costs can vary significantly across borders.
● Analysts: Professional insurance analysts will not have to worry as much about differing standards between insurance companies in different parts of the world.
● Investors: Venture capitalists and other investors might use IFRS 17 to bolster their portfolios and to choose investments more wisely.
IFRS 17 will not go into effect until the start of 2021, but accounting professionals may want to start preparing now, whether they are based in the United States or abroad. Obtaining a master’s degree in accounting could help accounting professionals delve deeper into international accounting standards, specifically with regard to the insurance sector.
Learn more about Maryville University’s online Master of Science in Accounting degree program and its potential benefits for seasoned accounting professionals.
Business Times – Quick take: New accounting rule will deliver greater transparency in insurance sector
The Actuary – General insurance: The wide-ranging implications of IFRS 17
South China Morning Post – New rules set to shake up the global insurance industry
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