The International Accounting Standards Board issued International Financial Reporting Standard (IFRS) 17 Insurance Contracts on May 18. The IASB says this “first truly international IFRS Standard” for insurance contracts will allow for a better understanding of insurers’ risk exposure, profitability and financial position.
IFRS 17 replaces IFRS 4, brought in as an interim Standard in 2004. IFRS 4 allowed companies to carry on accounting for insurance contracts using national accounting standards. This resulted in a multitude of different approaches. “As a consequence, it is difficult for investors to compare and contrast the financial performance of otherwise similar companies,” stated the IASB in an announcement.
Solves comparison problems
IFRS 17 solves the comparison problems created by IFRS 4 by requiring all insurance contracts to be accounted for in a consistent manner. Insurance obligations will be accounted for using current values instead of historical cost. Information will be updated regularly, providing more useful information to users of financial statements, says the IASB.
“The insurance industry plays a vital role in the global economy; high-quality information to market participants on how insurers perform financially is therefore extremely important. IFRS 17 replaces the current myriad of accounting approaches with a single approach that will provide investors and others with comparable and updated information,” said Hans Hoogervorst, IASB Chairman.
IFRS 17 has an effective date of 1 January 2021, although insurers can apply it earlier.