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FRC publishes review of IFRS 17 ‘Insurance Contracts’ interim disclosures in the first year of application
Publication date: 16 Nov 2023
uk In brief UK2023-38
What is the issue?
IFRS 17, ‘Insurance Contracts’, represents a fundamental change in accounting for insurance contracts, introducing a more comprehensive principles-based approach to replace the existing fragmented approach adopted under IFRS 4.
IFRS 17 applies to insurance contracts regardless of the entity that issues them, and so it does not apply only to traditional insurance entities. IFRS 17 is mandatory for annual reporting periods beginning on or after 1 January 2023, with restatement of comparatives for the previous reporting period (that is, from 1 January 2022 for calendar year-ends).
Review scope
The FRC’s review focused on the adequacy of disclosures regarding the effect of the transition to IFRS 17 in the first year of adoption. Whilst the review focused on the interim financial statements of 10 listed life and general insurers, the sample also included specialty, re-insurance and bancassurance. The thematic review has also considered disclosures made by non-insurance groups where a material impact of IFRS 17 had been disclosed.
Key observations
The FRC’s report makes the following key observations:
- Companies should provide high-quality disclosures in respect of complex or subjective areas on a disaggregated basis. Companies should consider providing both quantitative and qualitative disclosures, which are sufficiently disaggregated to enable users to understand how insurance contracts are measured and presented in the financial statements - particularly in areas of judgement, such as the choice of transition method, the determination of risk adjustment, and discount rates. When determining an appropriate level of aggregation or disaggregation, companies should consider which provides the most useful disclosure.
- Accounting policies should be company-specific. Companies should avoid boilerplate language, and accounting policies should be specific to the company and its business. Policies should be sufficiently granular to enable users to understand the approach taken by the company for each material line of business, and they should give clear, and consistent, explanations of accounting policy choices.
- Disclosure of significant judgements and estimates should be sufficiently detailed. Companies should clearly distinguish between key judgements and major sources of estimation uncertainty, as identified under IAS 1, ‘Presentation of Financial Statements’, and other judgements and estimates made in the application of IFRS 17:
- Disclosure should be entity-specific and provide details of the particular judgements made by management.
- Where significant sources of estimation uncertainty exist, companies should quantify the assumptions underlying significant estimates and provide meaningful sensitivities and/or ranges of reasonably possible outcomes.
- Companies should explain the transition approach adopted. Companies should clearly explain the impact of IFRS 17 transition. Where material to the business, disclosures should include details of the methods and assumptions used to measure insurance contracts at the transition date, and they should provide quantitative information, including the reconciliation of the contractual service margin (CSM) and revenue by transition method.
What is the impact?
Clear expectations for reporting going forward
The FRC has set out the following key expectations:
- Provide quantitative and qualitative disclosures, that are both decision-useful and company-specific, which meet the disclosure objective of IFRS 17 and enable users to understand how insurance contracts are measured and presented in the financial statements.
- Ensure that accounting policies are sufficiently granular and provide clear, consistent explanations of accounting policy choices, key judgements and methodologies, particularly where IFRS 17 is not prescriptive.
- Where sources of estimation uncertainty exist, provide information about the underlying methodology and assumptions made to determine the specific amount at risk of material adjustment and provide meaningful sensitivities and/or ranges of reasonably possible outcomes.
- Provide sufficiently disaggregated qualitative and quantitative information to allow users to understand the financial effects of material portfolios of insurance (and reinsurance) contracts.
- Clearly explain the impact of transition to IFRS 17, including details of underlying methodology to measure insurance contracts at the measurement date and disclosure of reconciliations of the CSM and revenue by transition method.
- Ensure that alternative performance measures, and any changes to such measures, are adequately explained, not given undue prominence, and reconciled to the most directly reconcilable line item in the financial statements.
When does it apply?
The FRC expects entities to consider the guidance immediately and to incorporate the guidance in their reporting and disclosures where necessary going forward.
Where do I get more details?
Refer to this link for the FRC’s report.
Please reach out to your usual PwC contact if you have any queries with regard to the guidance contained within this In brief.
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