General Impacts
IFRS 17 - Insurance contracts may impact Statement of Financial Positions, Statement of Other Comprehensive Income, Statement of Cash Flow, and Notes to the Financial Statements.
IFRS 17’s measurement models will have different impacts on certain items in financial statement, mainly "premiums" and "insurance contract liabilities".
Premiums: the recognition is no longer based on due premiums or premiums received but will mainly include changes in the liability for remaining coverage and release of insurance acquisition cash flows.
Insurance contract liabilities: according to both IFRS 4 and IFRS 17, insurance contract liabilities include the liability for incurred claims and the liability for remaining coverage. The most striking difference in IFRS 17 is that the liability for remaining coverage includes contractual service margin.
Thus, contractual service margin can be seen as the key factor to reflect the current and future development of insurance companies through premiums and insurance contract liabilities.
Overview
In May 2017, International Accounting Standards Board (IASB) issued IFRS 17 - Insurance contracts and prepared a new accounting standard for insurers. While the current standard, which is IFRS 4, allows insurers to use their Generally accepted accounting principles (GAAP), IFRS 17 defines clear and consistent rules that will significantly increase the comparability of financial statements and the impacts on global size. IFRS 17, when effective, will replace IFRS 4.
IFRS 17 is applicable for annual periods beginning on or after 01 January 2023. Early application is permitted for entities that apply IFRS 9 - Financial instruments and IFRS 15 - Revenue from contracts with customers at or before the date of initial application of IFRS 17.
The standard can be applied retrospectively under IAS 8, but it also contains a “modified retrospective approach” and a “fair value approach” for transition, depending on the availability of data.
Conversion issues
In Vietnam, there is only VAS 19 which was comparable with IFRS 4. About IFRS 17, there is none at the issuance of this publication.
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Content |
IFRS |
VAS |
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Insurance contracts – IFRS 4 |
Insurance contracts – VAS 19 & other guidance of Ministry of financial (MOF) about related to life and non-life insurances |
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Scope and definition |
IFRS 4 - Insurance Contracts guides on accounting for insurance contracts to perform in local GAAP. IFRS 4 applies to all insurance and reinsurance contracts issued by an entity. The Standard does not specifically address other aspects of accounting that apply to insurers, such as financial assets or financial liabilities. Other than permitting an insurer in specified circumstances to reclassify some or all their financial assets at fair value through profit or loss and containing temporary exemptions relating to the application of IFRS 9. Insurance contracts are contracts where an entity (the issuer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.
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VAS 19 - Insurance Contracts is based on IFRS 4 and is consistent with IFRS 4 other than those subsequent amendments in IFRS 4. However, as there is no guidance by the Ministry of Finance for the implementation of VAS 19. Hence, insurance companies apply specific accounting guidance rather than VAS 19, including accounting guidance in Circular No. 199/2014/TT-BTC dated 19 December 2014 of the Ministry of Finance (for life insurance entities and reinsurance entities) and in Circular No. 232/2012/TTBTC dated 28 December 2012 of the Ministry of Finance (for non-life insurance entities and reinsurance entities). As a result, commonly used accounting policies for insurance contracts have several areas that are different from IFRS 4, such as the requirements to account for catastrophe reserve and provisions for a future claim, or the omission of liability adequacy test, impairment of insured assets and the disclosure of embedded values. |
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Insurance contracts – IFRS 17 (No equivalent VAS) |
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Recognition |
Risk transferred in the contract must be insurance risk except for financial risk. It allows entities to continue with their existing accounting policies for insurance contracts if those policies meet certain minimum criteria. One of the minimum criteria is that the amount of insurance liability is subject to a liability adequacy test. This test considers current estimates of all contractual and related cash flows such as claims handling costs, as well as cash flows resulting from embedded options and guarantees. If the liability adequacy test identifies that the insurance liability is inadequate, the entire deficiency is recognized in profit or loss. In addition to other advanced requirements, the disclosure of insurance risk information, firstly, such as, a sensitivity analysis that shows how profit or loss and equity would have been affected by the relevant risk variable (e.g. mortality and morbidity, interest rates, etc.). Then, the methods and assumptions used in preparing the sensitivity analysis. Lastly, qualitative information about sensitivity and information about those terms and conditions of insurance contracts that have a material effect on the amount, timing uncertainty of the insurer’s future cash flows. Under IFRS 17, the “general model” requires entities to measure an insurance contract, at initial recognition, at the total of the fulfilment cash flows (comprising the estimated future cash flows, an adjustment to reflect the time value of money and the financial risks related to the future cash flows, to the extent that the financial risks are not included in the estimates of the future cash flows, and a risk adjustment for non-financial risk) and the contractual service margin. The fulfilment cash flows are re-measured on a current basis in each reporting period. The unearned profit (contractual service margin) is recognized over the coverage period. Aside from this general model, the standard provides, as a simplification, it can be named as a “premium allocation approach”. This simplified approach is applicable for certain types of contracts, including those with a coverage period of one year or less. For insurance contracts with direct participation features, the “variable fee approach” applies. The variable fee approach is a variation on the general model. When applying the variable fee approach, the entity’s share of the fair value changes of the underlying items is included in the contractual service margin. Therefore, the fair value changes are not recognized in profit or loss in the period in which they occur but over the remaining life of the contract. |
What must be done?
• Identify the terms of the insurance contract,
• Re-plan key activities and project timeline,
• More test activities are to be expected,
• Revaluate retrospectively under IAS 8,
• Optional scope exclusion for loan contracts and certain credit card contracts,
• Extension of the risk mitigation option to include investment contracts,
• Interface with IFRS 9, IFRS 15.