By Richard Olswang MA FIA, Principal at Barnett Waddingham
Once again drawing from his experience leading an IFRS 17 project for a major multinational insurer and his role at the European Financial Reporting Advisory Group, Richard Olswang will consider implications for non-listed entities.
Navigating the future: non-Listed entities and IFRS 17
Non-listed entities, including subsidiaries of listed groups, have the option to continue reporting under existing UK Generally Accepted Accounting Principles (UK GAAP) instead of adopting IFRS 17. The Financial Reporting Council (FRC) has decided to wait until there are several years of IFRS 17 implementation experience before aligning UK GAAP with the new standard. With post-implementation reviews by the International Accounting Standards Board (IASB) and the UK Endorsement Board not expected before 2027, it will be some time before non-listed entities are required to report under IFRS 17.
When developing IFRS 17, the IASB aimed for consistency in accounting for insurance contracts across companies and between subsidiaries within multinational groups, and a revenue definition that reflects the insurance coverage provided, comparable to other industries. However, some of these objectives may be less relevant for non-listed entities, and the FRC should consider this when evaluating the future of UK GAAP for insurers.
Concerns have been raised about IFRS 17's suitability for mutual insurers. Differences between the measurement basis for insurance contracts and the valuation approach for other balance sheet components can lead to non-zero equity, which may not reflect a mutual company's structure.
Additionally, IFRS 17 requires insurance contracts to be measured consistently, regardless of the company or fund in which they are written. For example, the same contractual service margin (CSM) would be established for a non-profit contract whether it sits in a shareholder fund, a 90:10 with-profits fund, or a mutual company, despite differing profit allocations between with-profits policyholders and shareholders.
The substantial costs of implementing IFRS 17 for listed entities, especially those writing long-term business, pose a challenge for smaller entities. Mutuals, in particular, may struggle to bear these costs, which would ultimately fall on their members, i.e. with-profits policyholders. A proportionate and cost-effective approach to incorporating IFRS 17 features into UK GAAP could be beneficial.
Although alignment between UK GAAP and IFRS 17 may be years away, companies should anticipate future changes. For instance, transformation projects in actuarial or finance systems could build in capacity for future adjustments, benefiting long-term planning.
"Regardless of UK GAAP's future direction, companies must stay informed about developments and position themselves to meet any new requirements. The insurance industry will have opportunities to influence outcomes through outreach activities and consultation exercises. Early engagement will likely lead to more successful outcomes."
Unlocking the potential of IFRS 17: insights and opportunities (part one)
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