Will the new IFRS 17 apply to Company X, a NON-insurance provider?
Think back to where you were as 2022 became 2023, at the stroke of midnight. It is possible that you felt the ground quiver at that precise moment; that you had an unshakeable feeling of a seismic change kicking into…
Blog15th Feb 2023
Think back to where you were as 2022 became 2023, at the stroke of midnight. It is possible that you felt the ground quiver at that precise moment; that you had an unshakeable feeling of a seismic change kicking into effect… It is possible that this sensation was quite unattached to the revelries of the season, and in fact, you were just attuned to a new International Financial Reporting Standard coming into effect…
For indeed, IFRS 17 Insurance Contracts – issued to fully replace the now-defunct IFRS 4 Insurance Contracts – finally became mandatory for accounting periods beginning from 1 January 2023. (Why ‘finally’? This new standard was issued in May 2017, with an original effective date of 1 January 2021 planned. But for global reasons we’re all probably aware of, there was a two-year delay in its implementation.)
IFRS 17 promises to shake up the accounting/disclosure for insurance contracts in the same way as IFRS 15 did for revenue and IFRS 16 did for leases. But – unlike those new standards – it may be more difficult to determine whether IFRS 17 will impact on your company at all. Everyone knows if they have a lease, or revenue; but an insurance contract…? That’s where this article comes in…
First, a key distinction: IFRS 17 only changes the accounting requirements for the insurance provider; not the policyholder. This feels like good news: if your company only takes out insurance contracts, and doesn’t issue them, then there’s nothing to see here. Except, maybe there’s more difficulty to be found in determining whether your company is ever an insurance provider…
Let’s make the reasonable assumption that if your company is a registered insurance provider, following international standards, you already know that IFRS 17 applies to you. Chances are, such entities have already been looking into this for years.
But what about companies following international standards who are not registered insurance providers, but perhaps dabble in transactions that could be considered as fitting under the ‘insurance’ banner? Maybe your company offers insurance provided by a third party to customers? Maybe your company provides customers with warranties over your product? Maybe your company offer a service to customers for when things go wrong?
Such a company may have concerns when they read that IFRS 17 applies to all insurance contracts, regardless of whether the entity that issues them is a registered insurance provider. But potential relief comes, with the realisation that scope exemptions in IFRS 17 allow for some contracts – even if meeting the definition of an insurance contract in this new standard – to be excused from the new accounting requirements.
So before we can consider whether these exemptions apply, what is the definition of an insurance contract under IFRS 17? Quoting directly from the standard’s glossary, an insurance contract sees “one party (the issuer) accept significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder.”
With this definition in mind, let’s consider three illustrative scenarios that your company – Company X – might encounter, and whether the new accounting treatment would have to be applied in each…
|Scenario||Meets definition of insurance contract?||Accounting treatment||Conclusion|
|Company X offers a product/service to customers, with insurance available as an ‘add on’. Eg, a car rental company offering insurance to customers renting a car.||If the customer takes this ‘add on’, there is certainly an insurance contract present. The ‘insured event’ being something going wrong in the car, and the ‘policyholder’ being the end customer.||The key here is whether Company X is acting as an intermediary for another company who is actually providing the insurance. Perhaps Company X earns a commission when the insurance is taken out, but consider whether Company X itself is required to compensate the policyholder if something goes wrong. If not, and this duty has been transferred to the third party, then IFRS 17 does not apply to Company X itself.||IFRS 17 does not apply if Company X is merely acting as an intermediary between the policyholder and the insurance issuer. But if Company X is itself providing the insurance – paying out if something goes wrong – then it will have to follow the new IFRS 17 requirements.|
|Company X offers a warranty on products sold. If the goods sold to their customers are found to be defective within a certain time-period, the customer is partially reimbursed.||The definition is met: Company X has agreed to compensate the policyholder if a specified uncertain future event (the product being defective) adversely affects the policyholder.||IFRS 17 draws a distinction when considering warranties, based on whether the warranty is being offered by the manufacturer/dealer/retailer of the product in question. If so – like we have in this scenario – then IFRS 17 need not apply. Whereas if the warranty is provided by a separate third party, who is not a manufacturer/dealer/retailer of the product, then that third party would need to apply the new accounting treatment.||If the warranty is being offered by the manufacturer, dealer or retailer of the product, then IFRS 17 need not apply.|
|Company X offers a ‘fixed fee service contract’ to its customers, whereby for a fixed monthly payment from the customer, Company X will provide a service in specified circumstances. Eg, mobile phone repair, or breakdown assistance.||Again this is within the definition: Company X will compensate the policyholder (by providing the repair service) if a specified uncertain future event occurs, such as the phone being damaged or the car breaking down.||Key here is the fact that Company X will be providing the customer with a service if something goes wrong, rather than cash. So even though the definition is met – and Company X could choose to apply IFRS 17 if it wishes – the new accounting requirements can be ignored, as long as these other conditions are also met:
– The price Company X charges to the customer does not reflect an assessment of that customer’s individual risk;
– The risk from Company X’s perspective is more concerned with whether the customer needs to use the service offered rather than the potential varying cost of the service (eg, the phone repair will cost a similar amount to any other, if it happens).
|If the three specified conditions are met, Company X can treat this transaction using IFRS 15 rather than IFRS 17.|
These three scenarios are intended to illustrate two things:
- Transactions entered into by your company may fall within the remit of IFRS 17 even if your company is not a registered insurance provider. You may never use the word “insurance”, but still find your company’s transactions are caught within the definition quoted above.
- Even when your company’s transactions do meet that definition, it is still possible that IFRS 17 can be side-stepped, if certain conditions are met.
With IFRS 4 having made way for IFRS 17, anyone preparing accounts for companies following the international standards should carefully consider whether there are any transactions that might fall within the scope of the new standard. This may be a more difficult consideration that one would at first assume. And even if it is very likely that companies that are not registered insurance providers will end up being able to avoid any changes to their accounting practices, this should still – of course – be an informed decision, made with confidence, rather than making the assumption that if you never use the word “insurance” the new standard definitely won’t apply to you.
So to once again put your mind back to the stroke of midnight on 1 January 2023: Like was said above, it is possible that you had an unshakeable feeling of seismic change due to IFRS 17. But in truth, this is only likely if you were at a party populated by registered insurance providers. For everyone else, this new year probably rolled in just like the old one. But if in any doubt, get in touch and we’ll be happy to help put your mind at ease.
If you have any queries regarding IFRS 17, please do not hesitate to contact Peter Reid or your usual AAB contact.