IFRS 17 in Financial Services UK
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This is the first in a series of posts focusing on themes and hot topics relevant to Internal Audit functions in organisations in the process of adopting IFRS 17 Insurance Contracts.
IFRS 17 is the most significant change in insurance accounting for a generation. For many insurers, particularly in the Life Insurance industry, understanding and delivering the necessary changes is complex and permeates the entire organisation. With this in mind, it is clear that an effective implementation plan that is well understood by its users is critical to an organisation’s IFRS 17 project running successfully.
On 16 April, the European Parliament adopted in Plenary a Regulation on the prudential requirements for investment firms (IFR) and a Directive on the prudential supervision of investment firms (IFD). IFR/IFD introduces prudential requirements for investment firms, tailored to their activities and asset size. IFR/IFD also revises the MiFID II/MiFIR third-country regime for investment services.
In November 2018, the IASB announced a proposed amendment to the IFRS 17 standard revising the effective date from 1st Jan 2021 to 1st Jan 2022. The proposed twelve month delay is based on case study and industry feedback to the IASB and allows insurers more time to assess and implement changes required to meet the IFRS 17 requirements as set out in the standard. As mentioned in ‘IFRS 17 implementation – What are insurers doing to prepare’ [Ref] amendments to the standard are expected to be confirmed later in 2019. IFRS 17 programme leadership are being thoughtful on how to adapt their programmes and optimise the programme's effort during this interim period to the IASB confirming any outlined changes to IFRS 17, whilst progressing with the current implementation plan.
Reinsurance continues to be one of the most contentious aspects of the standard for our clients. The key question remains - will the standard setters finally resolve the issues highlighted by reinsurers and direct insurers in terms of the measurement model for reinsurance?
In mid-November, the IASB confirmed its intention to propose a 12-month deferral of IFRS 17 along with a parallel shift of the deferral of IFRS 9 for insurers if those insurers use the option to defer IFRS 9. They recently discussed potential amendments to IFRS 17 ‘Insurance Contracts’ across thirteen topics at their London meeting on 11-13 December 2018. Of these, the Board decided to amend for one topic (balance sheet presentation), deferred one topic (on transition) but agreed not to amend the remaining eleven. A further twelve topics are expected to be discussed in early 2019.
When the Apache attack helicopter was developed it included a monocle for the pilot which gave a heads up display to their right eye featuring a plethora of high level information - keeping an eye on things became a more challenging task when you had to divide your vision to get a holistic view of the battlefield.
Many insurance businesses are struggling with the treatment of reinsurance held under IFRS17. Much of the struggle is to understand the accounting implications, but there are a number of tax issues that businesses should be addressing at the same time. This highlights the importance for businesses of making a place for their tax team within the leadership of the IFRS 17 implementation project.
As someone who has delivered systems changes in finance and actuarial teams for insurance clients for over two decades, I have mixed feeling following the firming up of the IFRS 17 rules and deadlines.