(c) South Africa Institute of Chartered Accountants. Contact SAICA for permission to reproduce this article., Financial Reporting

Proposed deferral of IFRS 17

By Esther Pieterse and Gerdus Dixon

This is not the time to take the foot off the pedal…

The International Accounting Standards Board (IASB) at its meeting on 14 November 2018 tentatively decided to propose that:

  • The mandatory effective date of IFRS 17, Insurance Contracts (IFRS 17), be deferred by one year, to 2022, and
  • The fixed expiry date for the optional temporary exemption from applying IFRS 9, Financial Instruments (IFRS 9), which is granted to insurers meeting certain criteria, also be deferred by one year, to 2022

This means that all companies preparing financial statements under IFRS would be required to apply both IFRS 9 (if not adopted earlier) and IFRS 17 for annual periods beginning on or after 1 January 2022.

As with all IASB decisions, this decision will be considered tentative until the IASB has completed its normal due process. An exposure draft for public comment will be issued this year.

Reaction from insurers in South Africa

Although South African insurers generally welcome the proposed deferral, the industry recognises it also brings with it some complexity. Their response needs to be assessed against the backdrop of a diverse industry as it relates to size and types of policies underwritten.   

The larger and more complex insurers appear to be further down the track with their IFRS 17 implementation projects. At the end of 2018 most of these insurers had established IFRS 17 governance and project structures and completed high-level impact assessments. They now consider the data needs coupled with the specifications for the calculation and reporting software they wish to acquire or build. 

Small to medium insurers have raised IFRS 17 awareness in their finance teams and governance structures and considered the impact of the standard holistically. However, only a few of these insurers have moved into implementation activities.

Benefits of a deferral

Insurers with advanced implementation projects will be able to use the extra time to alleviate project pressures and to better understand the preliminary results reported under the new standard. The deferral will give them time to assess the outcome of IFRS 17 and to refine their solutions.

The benefits of an IFRS 17 deferral for insurers, specifically those still in the planning stage, include more time to:

  • Understand the impact on the systems, processes and accounting
  • Plan the implementation
  • Upskill technical staff
  • Improve data quality, and
  • Implement a well-designed solution that is sustainable

The extra time also allows for better management of the business change needed within the insurer. Insurance revenue and cost metrics under IFRS 17 may be very different to what currently appears in management information packs. Performance management and strategic planning should align with these new metrics and those responsible for these activities require time to understand and be able to explain the new business results. 

Disruption to insurers?

Any form of delay inevitably brings with it disruption for insurers that have already planned and started executing their IFRS 17 implementation projects. We highlight a few of these factors below:

The risk that the IFRS 17 programme could lose focus

Pushing out an implementation date necessitates a review of project budgets and staffing plans. The additional time available may allow insurers to redeploy IFRS 17 project staff to carry out other unrelated activities or release its external contractors for a period. However, this introduces a risk that key resources do not return to the project and could also put strain on IFRS 17 budgets based on the original implementation timelines.

The timing of mandatory audit firm rotation is impacted

Even before the proposed change in IFRS 17’s effective date, audit committees were grappling with whether to require the incumbent external auditors to provide assurance over the IFRS 17 restatements, or rather wait for the new auditors to do so. Insurers audited by the same audit firm for ten years or more require a change in auditors for financial years commencing on or after 1 April 2023.  Pushing out the IFRS 17 implementation date to financial years beginning on or after 1 January 2022 may require past decisions on the appointment date of new auditors to be reconsidered. 

Further changes to IFRS 17 are expected

In making its tentative decision on the implementation date, the IASB acknowledged that future amendments to IFRS 17 could disrupt the progress of implementation programmes. Even if the amendments are aimed to ease implementation issues it still could cause disruption. Insurers may be necessitated to re-perform certain work. 

Some of the potential changes the IASB is considering were discussed at its December 2018 and January 2019 meetings. The potential changes are not merely cosmetic and include:

  • Recognition of insurance acquisition cash flows for renewals outside the contract boundary
  • More symmetrical accounting for reinsurance contracts held in respect of onerous underlying insurance contracts, and
  • Allocating the contractual service margin on the basis of coverage units that are determined by considering both insurance coverage and any investment return service

The IASB’s expectation is that insurers will use the additional year to deal with the implementation challenges brought about by such changes. Getting an early understanding of these new requirements will be key for an IFRS 17 programme and the implementation plan should allow flexibility to deal with a standard that may be amended by the IASB.

Summary

Overall, we expect that the IASB’s tentative decision to defer the effective date of IFRS 17 will have a positive impact. The general consensus is that the extra time does offer insurers much-needed breathing space even though users of financial statements will have to wait an extra year to see benefits from IFRS 17. Also, increased implementation costs are expected. 

The deferral allows the IASB to make changes to IFRS 17 to address concerns raised by the industry since IFRS 17 implementation projects commenced. The extra time should be used wisely by insurers. This is no time to take the foot off the pedal.