In our previous article on ESEF taxonomy, we talked about Common Reporting practices, the addition of new elements, removed elements, changes in accounting standards, and the re-modeling of the taxonomy structure. In this article, we’ll be discussing IFRS 17, its applicability, and its impact.
In May 2017, the International Accounting Standards Board (IASB) completed its project on IFRS 17 Insurance Contracts. IFRS 17 was introduced as a replacement for IFRS 4. IFRS 4 was an interim standard and was issued until the IASB completed its project on insurance contracts. Therefore, IFRS 17 supersedes IFRS 4.
As per the new standard, insurers are required to disclose certain information in financial statements and notes. This standard resulted in the biggest change in the accounting of insurance entities in the last 2 decades.
IFRS 17 is applicable for reporting period starting on or after 1 January 2021.
An entity shall apply IFRS 17 to:
(a) Insurance contracts, including reinsurance contracts, it issues;
(b) Reinsurance contracts it holds; and
(c) Investment contracts with discretionary participation feature it issues; provided the entity also issues insurance contracts.
Key Difference: Aggregation of Contracts with similar risks into Portfolios
As per IFRS 17 requirements, an entity shall identify portfolios of insurance contracts. A portfolio comprises contracts subject to similar risks and managed together.
An entity shall divide a portfolio of insurance contracts issued into a minimum of:
(a) A group of contracts that is onerous at initial recognition, if any;
(b) A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any; and
(c) A group of the remaining contracts in the portfolio, if any.
Impact of IFRS 17 on Companies’ Primary Financial Statements
Let us analyze the impact of IFRS 17 on Primary financial statements.
1) In the statement of financial position (Balance Sheet)
An entity is required to present the carrying amount of the following groups in the statement of financial position:
(a) insurance contracts issued that are assets;
(b) insurance contracts issued that are liabilities;
(c) reinsurance contracts held that are assets; and
(d) reinsurance contracts held that are liabilities.
1.1) Changes in ESMA ESEF 2019 Taxonomy:
In the presentation link ‘ Statement of financial position, order of liquidity, the following elements are added due to the above requirements:
2) In the statement(s) of financial performance (Profit or loss statement and another comprehensive income statement)
An entity is required to present a breakdown of the amounts recognized in the profit or loss statement and another comprehensive income statement into:
- a) An insurance service result, comprising insurance revenue (revenue arising from the groups of insurance contracts issued, excluding any investment component) and insurance service expenses (expenses arising from a group of insurance contracts it issues, comprising incurred claims and other incurred insurance service expenses, excluding any investment component); and
(b) Insurance finance income or expenses (the change in the carrying amount of the group of insurance contracts arising from the impact of the time value of money, impact of changes in assumptions that relate to financial risk, with some exceptions).
Additionally, income or expenses from reinsurance contracts held need to be presented separately from the expenses or income from insurance contracts issued.
2.1) Changes in ESMA ESEF 2019 Taxonomy:
In the presentation link ‘ Statement of comprehensive income, profit or loss, by function of expense’ and ‘ Statement of comprehensive income, profit or loss, by nature of expense’, the following elements are added due to the above requirements:
In the presentation link ‘ Statement of comprehensive income, OCI components presented net of tax’, the following elements are added due to the above requirements:
In the presentation link ‘ Statement of comprehensive income, OCI components presented before tax’, the following elements are added due to the above requirements:
Other Changes in ESMA ESEF 2019 Taxonomy:
In the new version of the taxonomy, the new presentation link ‘ Notes – Insurance contracts (IFRS 17)’ is added for the tagging of disclosure related to Insurance contracts. Three hundred forty-one elements are added under this link.
Onerous Contracts: An insurance contract is onerous at the date of initial recognition if the fulfillment cash flows allocated to the contract, any previously recognized acquisition cash flows, and any cash flows arising from the contract at the date of initial recognition in total are a net outflow.
Fulfillment of cash flows is an explicit, unbiased, and probability-weighted estimate (i.e. expected value) of the present value of the future cash outflows minus the present value of the future cash inflows that will arise as the entity fulfills insurance contracts, including a risk adjustment for non-financial risk.
We hope you found this high-level summary of Changes in ESMA ESEF 2019 Taxonomy related to IFRS 17 – INSURANCE CONTRACTS useful. Stay tuned for our upcoming blog where we will deep dive into another accounting standard the IFRS 13: Fair Value Measurements.