This article originally appeared in the CIA (e)Bulletin.
By Ralph Ovsec, FCIA
At a meeting on March 17, 2020, the International Accounting Standards Board (the Board) recommended delaying the effective date of the IFRS 17 Insurance Contracts to January 1, 2023. Early implementation will not be permitted. In addition, the Board proposed that the expiry date of the IFRS 9 temporary exemption for insurance contracts be similarly extended to January 1, 2023, to coincide with the proposed effective date of IFRS 17.
These extensions addressed a number of concerns raised by the insurance industry, including the coordination of the implementation efforts of IFRS 17 and IFRS 9. Companies are encouraged to continue to press forward at current pace and use this additional time to strengthen their processes and procedures, as well as allow for more testing, dry runs, and contingencies. A shared effective implementation date for IFRS 17 and IFRS 9 is expected to avoid temporary earnings mismatches that would otherwise exist and reduce implementation costs. The current global environment has suddenly added significant resource and time constraints to insurers’ operations, and this additional respite will help reduce those near-term pressures on insurers.
In extending the IFRS 17 effective date to January 1, 2023, the Board considered several, sometimes competing, concerns. Many regulators and users of insurers’ financial statements expressed some concern with an extension of the effective date beyond the January 1, 2022, date proposed in the June 2019 Exposure Draft Amendments to IFRS 17. Most agreed that the current insurance accounting standards are inadequate. An additional year of deferral would result in a further delay in improvements in insurance accounting practices and may subject insurers to additional implementation costs.
However, an additional one-year delay would allow insurers to strengthen their controls, provide additional time to implement complex systems for the myriad of insurance products that exist around the globe and offer more time to implement changes to the IFRS 17 proposed by the Board through the re-deliberation process. Small insurers, in particular, are expected to welcome additional time to implement. Also, some members of the Board felt this additional time would improve the quality of the results from the implementation. Therefore, the Board appeared to reluctantly extend the implementation date to January 1, 2023. The Board felt very strongly that a single effective date for IFRS 17 was critical in avoiding confusion in the interpretation of insurance company results if implementation at different points in time was allowed. For that reason, early implementation of IFRS 17 not be permitted.
IFRS 9 became effective for annual reporting periods beginning on or after January 1, 2018, when financial results were reported under IFRS 4. The Board granted a temporary exemption from applying IFRS 9 for results reported under IFRS 4. (Note that this exemption does not apply to insurance subsidiaries of banks.) This temporary exemption, granted to January 1, 2021 to coincide with the original IFRS 17 effective date, was meant to address both the costs of a second implementation of IFRS 9 as well as any confusion about accounting mismatches and profit or loss volatilities that would result if investment results were determined using IFRS 9 before IFRS 17 was implemented. Some IASB® members believe there are significant benefits in a single implementation date, given that most preparers’ processes are already on a trajectory to apply both standards coincidentally. For similar reasons, the Board proposed extending this temporary exemption for insurers from applying IFRS 9 to January 1, 2023, to coincide with the revised implementation date of IFRS 17.
The Board staff will incorporate the results of the re-deliberations of IFRS 17 into a revised standard, and the Board will vote on this amended IFRS 17 in the coming months. The Board has confirmed that the final IFRS 17 will be released in Q2 2020. Insurers are aware of the proposed changes to the standard and have already proceeded with their implementation. The updated IFRS 17 will likely result in additional implementation challenges for some insurers and it is important for insurers to continue to press forward with their implementation plans.
With appropriate internal and external resources dedicated, companies will be in a strong position once they begin reporting under IFRS 17 and IFRS 9 in 2023.
Ralph Ovsec, FCIA, is a member of the Canadian Institute of Actuaries.
This article reflects the opinion of the author and does not represent an official statement of the CIA.