By Richard Olswang MA FIA, Principal at Barnett Waddingham
While non-listed entities, including subsidiaries of listed groups, may continue to report under UK generally accepted accounting principles (GAAP), the Financial Reporting Council (FRC) has signalled a future alignment with IFRS 17, albeit pending several years of implementation experience. This suggests a significant shift on the horizon. The fact that such change is not immediate creates an opportunity for affected companies to prepare for the impact and seek to influence the future requirements.
In this series, Richard Olswang, drawing from his extensive experience leading the IFRS 17 project for a major multinational insurer and his role at the European Financial Reporting Advisory Group, will:
Consider the potential for further financial and operational optimisation under IFRS 17
Consider the future landscape for UK GAAP reporters.
Optimising outcomes: strategic choices and reporting considerations
When IFRS 17 was first introduced, the spotlight was on comparing its results with those under IFRS 4, especially regarding changes in shareholder equity and profit. However, the focus has now shifted towards using financial statements to explain ongoing business performance. Stakeholders are increasingly interested in profit growth, volatility, and the period-on-period movement in the Contractual Service Margin (CSM), which represents unearned future profit.
So, how can preparers optimise their IFRS 17 financial results moving forward? Although IFRS 17 prescribes a methodology, it offers several accounting policy choices. Being a principles-based standard, it requires numerous interpretations and judgments during implementation. Key areas include the discount rate, the risk adjustment approach, and the method for calculating coverage units (used to amortise the CSM into profit or loss). These choices and judgments can significantly impact financial outcomes.
Alternative performance measures
Beyond the mandatory disclosures under IFRS 17, many companies also report alternative performance measures (APMs), often referred to as non-GAAP measures. A common example is Adjusted Operating Profit, designed to:
smooth out volatility from short-term fluctuations not representative of the nature of long-term business;
eliminate the impact of accounting mismatches; and
adjust for requirements that do not reflect the true economics of the business.
Refining policies
Companies should consider whether there is scope to amend policy choices or judgments or refine their APM definitions to better explain actual business performance. Key decisions include how to:
Adapt to business changes, such as new products, reinsurance arrangements, hedging strategies, or acquisitions/divestitures.
Incorporate the effects of emerging experience and changes in market conditions.
However, some constraints may limit the ability or desire to make changes. For instance:
Any change in policy choice or judgment must be evaluated to determine if it constitutes a change in accounting policy (requiring retrospective application per IAS 8) or a change in accounting estimate (applied prospectively).
While APM definitions are largely at the preparer's discretion, users expect consistency across the industry. The FRC's Thematic Review of IFRS 17 disclosures emphasises the need for consistent APM presentation over time to provide meaningful trend information. Additionally, IFRS 18, effective from 1 January 2027, will require a reconciliation between management performance measures and the IFRS income statement.
Operational efficiency: streamlining IFRS 17 implementation
Implementing IFRS 17 required many preparers to embark on significant financial transformation programs. These initiatives included:
overhauling actuarial models;
developing engines to calculate the Contractual Service Margin (CSM);
creating storage solutions for vast amounts of new data; and
upgrading finance systems like general ledgers and consolidation tools.
All of this was supported by the necessary ‘plumbing’ to connect these systems and establish robust processes and control mechanisms.
Given the complexity of these requirements and new systems, the initial focus was on meeting reporting deadlines. In some cases, deadlines were extended from those under IFRS 4 to accommodate longer reporting processes. Manual adjustments, often in spreadsheets, were used as short-term tactical solutions for specific issues.
Now, the industry has a chance to reflect on this experience and explore opportunities to enhance operational efficiency. There is potential to implement improvements that:
accelerate reporting processes;
reduce manual interventions;
integrate out-of-model adjustments into core systems; and
strengthen controls.
Some systems and processes may have become overly complex, and simplifications could be made without departing from IFRS 17 requirements or distorting financial results. For instance, could a less granular unit of account still comply with the standard while reducing model run times and data processing needs?
However, insurers have already incurred substantial costs implementing IFRS 17, following closely on the heels of Solvency II implementation costs. Therefore, there is likely limited appetite for significant further expenditure unless it can be shown that these costs will lead to tangible benefits, such as reduced ongoing costs, shorter reporting timescales, better controls, or improved management information.
Next steps
"Now is the time for insurers to reflect on the experience of the first years of IFRS 17 implementation and consider what options exist to improve operational efficiency and further optimise financial outcomes."
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