UK raises additional issues with IFRS 17
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UK’s accounting experts have raised three more issues with IFRS 17, one of which has been escalated to the IFRS Interpretations Committee, the interpretative body of the International Accounting Standards Board.
The IFRS IC is due to decide on 29 November whether the problem with premium receivables from intermediaries deserves further discussion.
The UK Endorsement Board already approved the standard on 16 May this year, acknowledging there are still concerns such as how to recognise annuity profits and reinsurance to close transactions, but it concluded that overall, the standard met its endorsement criteria.
The Board has since then highlighted two more concerns and asked industry stakeholders about the below since the endorsement of IFRS 17 in the UK:
· Premium receivables from intermediaries;
· ‘Hybrid’ contracts.
Given these were seen as interpretation issues and therefore not material, the UKEB said no decision was needed from board members at this stage and it would keep monitoring the issues.
IFRS 17 or IFRS 9?
For premium receivables from intermediaries such as brokers, the question is whether they should be accounted for under IFRS 17 or under IFRS 9 Financial Instruments.
Intermediaries help insurers sell their insurance contracts and assist policyholders to buy them. Often the intermediary collects policyholder premiums on behalf of the insurer. However, it is not clear whether in accounting for premiums that have been collected by an intermediary but not yet forwarded , the insurer should apply:
· IFRS 17, as expected cash inflows not yet received; or
· IFRS 9, as a financial asset receivable from an intermediary.
Peter Drummond, senior project director at the UKEB, explained at a meeting on 17 November: “It does relate to the interaction of the two standards and there isn't clarity on how that works.”
According to an agenda paper prior to the meeting, the issue affects the data that needs to be gathered and the design of accounting systems.
“If IFRS 9 is applied, receivables are not included in the measurement of fulfilment cash flows under IFRS 17 but recognised as a separate asset under IFRS 9,” the paper reads.
The Board noted the appropriate accounting depends on the contractual arrangements: that is, in broad terms, whether the insurer must fulfil its obligations to the policyholder even if it has not received the premium from the intermediary.
“If not, balances held by the intermediary are expected to be in the scope of IFRS 17.”
Some viewed this as an operational issue.
One Board member said at the meeting: “If they're [recognised on] IFRS 9 you do expect a credit loss but given the short-term nature of these receivables, it is almost certainly going to be immaterial. So I think it's really just an operational question.”
Board members were also told insurers may not always be able to obtain the information from intermediaries that would be needed if they had to apply IFRS 9.
Drummond concluded: “Part of the issue may relate to the fact that IFRS 9 says it scopes out amounts which arise from insurance contracts, but IFRS 17 takes a broad perspective and includes within the overall measurement of insurance liability cash flows which don't necessarily arise strictly under the insurance contract.”
He added: “For example, expenses of acquisition commissions, they may not be within the insurance contract. They may be in a separate contract, but they're part of the whole bundle of rights and obligations. So IFRS 17 takes a slightly different approach to the scope of what it includes.”
The matter is currently under consideration by the IFRS IC, with two papers submitted on this issue. The Committee is due to introduce the topic on 29 November and decide whether it merits further discussion.
Hybrid contracts
Hybrid contracts are described as those where the policyholder has the option to invest in both unit-linked and with-profits funds, the UKEB explained.
“Contracts containing no significant insurance risk would be classified as investment contracts, so hybrid contracts invested 100% in unit-linked funds would be classified as investment contracts under IFRS 9,” it said“Those invested 100% in with-profits would fall within the scope of IFRS 17.”
For contracts lying between those extremes, the Board said judgment needs to be applied. The concern raised was that this could lead to arbitrary classification divisions and operational complexity.
The UKEB said it was informed by one audit firm that, to their knowledge, insurers have been able to develop models to account for the investment and with-profits components appropriately.
No consensus reached: LRC or LIC?
The UKEB raised another interpretation issue concerning the presentation of cash inflows receivable, for example premiums receivable, related to expired coverage, that is, to past insurance services. The Board said this matter was new and had not been discussed before.
The problem can arise when cash flows relating to expired coverage have not yet been settled. The Board understands this is common with reinsurance contracts, which might be subject to premium adjustments or net settled in arrears.
IFRS 17 distinguishes between the liability for remaining coverage - an insurer's obligation for insured events related to the unexpired portion of the coverage period - and the liability for incurred claims, which is an insurer's obligation to investigate and pay claims for insured events that have already occurred.
The concern is whether, to the extent such receivables relate to past service, they should be included in the LIC.
The UKEB said: “We have been informed that this is primarily a concern for general insurers applying the premium allocation approach and that the issue affects only the disclosure of insurance liabilities with no impact on the income statement.”
The Board added insurers are concerned about potential operational complexity if such receivables need to be included in the LIC.
“This reflects a concern that in some circumstances receivables would need to be tracked and moved from LRC to LIC, or allocated between them, to reflect the level of services already provided.”
The Board noted insurers and auditors have been unable to reach consensus on the question and the IFRS IC has been approached to examine the matter. However, it is not clear whether the IFRS IC will take up the task.
How are insurers affected with these issues?
