IFRS 17: Insurance Contracts (2023);
IFRS 9: Financial Instruments (2023).
IFRS 17 Insurance Contracts revised was issued by the IASB in June 2020 and endorsed by the EU to replace IFRS 4 Insurance Contracts. In December 2021, the IASB issued a limited scope amendment to IFRS 17 related to the classification overlay to address possible accounting mismatches between financial assets and insurance contract liabilities in the comparative information presented on initial application of IFRS 9 together with IFRS 17. IFRS 17 and IFRS 9 will be effective from 1 January 2023. IFRS 17 is expected to increase comparability by requiring all insurance contracts to be accounted for in a consistent manner. Insurance obligations will be accounted for using current values – instead of using the minimum of tariff rates (‘tariefgrondslagen’) or Solvency II (for the Liability adequacy test) as is currently the a.s.r. accounting policy (see accounting policy J and K).
This standard represents the most significant change to European insurance accounting requirements in decennia and will have a significant impact on the information presented in the financial statements (the primary statements as well as the disclosures). The standard introduces three models for the measurement of the insurance contracts. The general model (GM), the variable fee approach (VFA) for contracts with a direct participating feature and the premium allocation approach which is a simplified version of the GM and can be used mainly for short-duration contracts.
The GM measures insurance liabilities by taking the fulfilment cash flows, being the present value of future cash flows (PVFCF) including a risk adjustment (RA), and then adding a contractual service margin (CSM). The CSM represents the unearned profits of insurance contracts and will change the recognition of revenue in each reporting period for insurance companies. The VFA model is required for contracts with direct participating features and although it contains the same basic components as the GM (PVFCF, RA and CSM), the way in which the investments interact and specifically the manner in which the fair value movements and returns are recognised differ from the GM, whereby the outcome under VFA provides a better matching in the balance sheet and income statement for these contracts.
Under current a.s.r.’s accounting policy, revenue for insurance contracts is recognised when premiums are earned or received. Under IFRS 17, the insurance contract revenue depicts the insurance coverage and other services provided arising from the group of insurance contracts at an amount that reflects the consideration to which a.s.r. expects to be entitled in exchange for those insurance contract services. Revenue includes the release of the CSM and RA in profit or loss over the coverage period. Insurance service result is a new income statement line item which is effectively a net result on non-financial risks of all insurance contracts. Current economic and non-economic (e.g. actuarial) assumptions are used in remeasuring the fulfilment value at each reporting period.
IFRS 17 must be implemented retrospectively with amendment of comparative figures. However, simplifications may be used on transition when the full retrospective approach is impracticable.
IFRS 9 is effective from 1 January 2018 and EU endorsed. a.s.r. applies the temporary exemption from applying IFRS 9 for predominant insurance entities as permitted by the amendments to IFRS 4. The IFRS 4 amendments postpone the implementation of IFRS 9 until the effective date of the new insurance contracts standard IFRS 17. Due to this exemption, there is currently no impact of IFRS 9 on the consolidated financial statements of a.s.r. but it may have a significant impact on shareholders’ equity, net result and / or other comprehensive income and on the consolidated financial statements of a.s.r. in 2023.
The required disclosures as a result of the temporary exemption from applying IFRS 9 have been provided in chapter 6.7.3 Fair value of financial assets categorised into two groups based on business model and SPPI test results.
IFRS 9 replaces most of the current IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial assets and liabilities, impairment of financial assets and hedge accounting.
The classification and measurement of financial assets under IFRS 9 will depend on a.s.r.’s business model and the instrument’s contractual cash flow characteristics. These may result in financial assets being recognised at amortised cost, at fair value through other comprehensive income (equity) or at fair value through profit or loss. In many instances, the classification and measurement under IFRS 9 will be similar to IAS 39, although certain differences will arise. The classification and measurement of financial liabilities remains unchanged. The final outcome of the classification and measurement will be highly dependent on the interaction between IFRS 17 insurance contract accounting and IFRS 9 accounting for financial assets and liabilities, taking into account decisions and guidance prepared in the IFRS 17 and IFRS 9 implementation project.
The recognition and measurement of impairments under IFRS 9 is intended to be more forward-looking than under IAS 39. The new impairment requirements will apply to all financial assets measured at amortised cost and at fair value through other comprehensive income with the exception of equity instruments. Initially, a provision is required for expected credit losses resulting from default events that are expected within the next twelve months. In the event of a significant increase in credit risk, a provision is required for expected credit losses resulting from all possible default events over the expected life of the financial asset.
In 2017, a.s.r. started a combined programme to implement IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments. The largest milestones of the programme during 2021 were the 2021 dry-run which was performed in preparation for the 2022 year in which all systems will be brought into production and the opening balance sheet will be determined. In 2021, a.s.r. also started the audit process to ensure that the audit will be finalised for the 2023 reporting period.
In 2022, all systems will be brought into production. This enables a.s.r. to prepare the opening balance sheet and comparative figures for the income statement (parallel reporting) and further ensure that the programme will be finalised in 2023. The parallel reporting of both current IFRS and IFRS 17 and IFRS 9 figures in 2022 will place increased pressure on the available resources. As a result, management is closely monitoring progress to ensure that a.s.r. can meet its reporting requirements in this regard.
At this moment, given the complexity and options available in IFRS 17 and IFRS 9, it is too early to quantify the actual impact on IFRS equity and profit for the year. However, a.s.r. expects IFRS 17 in combination with IFRS 9 to have significant changes to its accounting policies and impact on shareholders’ equity, net result, presentation and disclosure.