IFRS 17: What is it and who does it apply to?
If you have never heard of IFRS 17, you are definitely not alone. You came here because you were looking for it and want to know more. What is it and who does it apply to? An accountant will know what this term means. But if you’re not, it’s a bit more complicated. So read more about it here.
At the end of June 2020, the International Accounting Standard Boards (IASB) issued the guidelines for IFRS 17. Before you wonder what IFRS is at all, here’s an explanation. IFRS stands for International Reporting Standards. These are standards for the accounting of annual reports of companies. All listed companies in Europe have been required to report according to these rules since 1 January 2005.
Various rules have been drawn up, including the following:
- IFRS 2
- IFRS 3
- IFRS 4
- IFRS 5
- IFRS 7
- IFRS 8
- IFRS 9
- IFRS 10
- IFRS 11
- IFRS 12
- IFRS 13
- IFRS 15
- IFRS 16
- IFRS 17
IFRS 17, who does it apply to?
IFRS 17 is for the processing of insurance contracts. It replaces the older IFRS 4. This new regulation serves to make the financial statements of insurance companies comparable internationally. The advantage of IFRS 17 is that investors can much more easily compare the results and future expectations of, for example, a German insurer with a Dutch or American insurer. The implementation of IFRS 17 must be completed in the year 2021. So the insurers that come out with financial statements in 2021 must have comparative figures for the year 2020.
The basis of IFRS 17 is the measurement model. This is a model applied to determine the value of insurance contracts. The model has a building block approach. In this approach, all insurance contracts are valued based on the fulfillment cash flows and the contract margin. Sounds complicated doesn’t it? In short, the fulfillment cash flow is the cash flows an insurer needs to meet its obligations to pay.
The PAA methodology and more information about those guidelines
The requirements of IFRS 17 are that insurance contracts are valued in the balance sheet from the first moment of recognition. To do this, an estimate of the cash flow of the expected costs and revenues must be made during the term of the contract. If the expected cash flow is negative, the contract is loss-making. The loss must then be charged directly to the result. Because an estimate of the cash flow has been made, the difference must be corrected for the risk adjustment. This is a surcharge that is for the risk that exists with the estimated cash flow. Is the insurance contract concluded with a term shorter than one year? Or does the contract have few fluctuations in the cash flow? Then a simple method applies: the PAA, Premium Allocation Approach. This method is similar to the profit determination of IFRS 4, where the basis is the unearned premium method.
Would you like to know more about IFRS 17? Then take a look at the extensive site of www.annualreporting.info. Here you will find all the information about this and other IFRS guidelines. If you have questions, you can always contact them.
