IFRS 4 vs IFRS 17

The purpose of establishing IFRS standards is to create a common

accounting language so that businesses and accounts can be understood and
compared between companies and between countries. The disclosure of
insurance contracts is covered by IFRS 4, but IFRS 4 has too many inconsistencies
to allow for fair comparisons between insurance companies and comparisons of
an insurance company to a non-insurance company, necessitating the use of IFRS
17. This provides a foundation for evaluating the impact of insurance contracts on
the entity's financial position, financial performance, and cash flows by those who
utilize financial statements.

IFRS 4 Main Issues

There were few changes made to the current insurance accounting
methods because IFRS 4 was only intended to be an interim standard when it was
implemented in 2004. With various accounting practices, insurance companies
might still compare identical insurance contracts. These practices developed
based on insurance contracts in a particular country, which also led to a
divergence between the accounting models used by the insurance business and
IFRS standards employed by other industries. As a result, there are few
opportunities for comparisons between the insurance and non-insurance sectors.

Existing Issues vs. how IFRS 17 improves accounting

Existing issues
 Treatment varies depending on the type
of contract and entity interpretation.
 Extremely outdated estimates, including
those for long-term contract discounts
 Some companies measure insurance
contracts based on the value of their
investment portfolios
 Some companies do not consider the time
value of money when measuring liabilities
for claims.
 Some multinational companies
consolidate their subsidiaries using
IFRS 17 requirements
 Companies will apply consistent accounting
for all insurance contracts.
 Estimates updated to reflect
current market-based information
 Companies will measure their insurance
contracts based only on the obligations
created by these contracts
 Companies will reflect the time value of
money in estimated payments to settle
incurred claims.
 A multinational company will measure
insurance contracts consistently within the
 different accounting policies for the same
type of insurance contracts written in
different countries.
 Revenue includes premium and may
include an investment component
 Reinsurance is calculated on a net basis
 Disclosures help users understand
amounts in the insurer’s financial
statements
group, making it easier to compare results
by product and geographical area.
 Revenue excludes any investment
component and represents the reduction of
the liabilities held as the entity provides
insurance service and respective risk is
released.
 Reinsurance is calculated separately
 Disclosures are more detailed and granular

Why does IFRS 17 replace IFRS 4?

The most recent accounting standard that addresses how an entity should
account for insurance contracts, and which addresses the identified drawbacks of
IFRS 4 (relevance, comparability, and transparency)
 Comparability of insurers
Under IFRS 4, insurers could report insurance contracts using a
variety of practices and, in consolidated financial reports, could
consolidate that variety of practices. IFRS 17 will introduce a
consistent framework for reporting insurance contracts. IFRS 4
allowed inconsistency with other industries, including the reporting
of deposits as revenue and, in some jurisdictions, the reporting of life
insurance revenue on a cash basis. Under IFRS 17, revenue is
intended to reflect services provided in the same way as other
industries.
 Transparency and quality of investor information
The objective of the new standard is to provide investors with better
knowledge about insurance contracts and the value that each insurer
generates. IFRS 17 accomplishes this, according to the IASB, by:
Combining current measurement of future cash flows with the
recognition of profit over the period that services are provided
under the contract.
Presenting insurance service results (including presentation of
insurance revenue) separately from insurance finance income or
expenses.
 Requiring an entity to make an accounting policy choice of whether
to recognize all insurance finance income or expenses in profit or
loss or to recognize some of that income or expenses in other
comprehensive income.
 Relevance
In many IFRS 4 implementations, outdated or locked-in assumptions
will be replaced by periodically updated current assumptions in IFRS 17.
IFRS 17 will accurately reflect the value of options and guarantees,
which was not always the case with IFRS 4 implementations. Discount
rates will take into account the IFRS 17 insurance contract liabilities
rather than the underlying assets. Overall, it is anticipated that IFRS 17
will more accurately reflect economic reality and the underlying
financial status and performance of insurance contracts.