The choice between the modified retrospective approach and the fair value approach on transition will impact shareholders’ equity on transition and the release of profit from the insurance contracts in force after the transition. It is also likely to affect operational complexity and the cost of IFRS 17 implementation. In addition, some profits from insurance contracts might not be recognised at all in profit or loss (that is, they would not have been recognized in profit or loss under IFRS 4 and will be recognized as an adjustment to equity on transition to IFRS 17), while other profits might be recognized in profit or loss twice (that is, they would have been recognized in profit or loss under IFRS 4 and will be recognized in the contractual service margin and then in profit or loss after transition to IFRS 17). This is an unavoidable result of differences between measurement approaches used under IFRS 4 and on the transition to IFRS 17.
Equity on transition and release of profit from insurance contracts after transition Practical implications of IFRS 17 transition choices
The contractual service margin on transition represents the profit from insurance contracts in force that insurers will earn after the transition. On transition, the higher the contractual service margin is, the lower is the accumulated profit from insurance contracts recognized in shareholders’ equity and the more profit insurers will recognize in future periods until the end of the coverage of insurance contracts in force on transition.
This might impact the ability to pay future dividends, solvency capital or taxation, depending on local legal and regulatory requirements. This might also impact the way in which investors assess the performance of the entity on transition and at future dates until the end of the coverage period of the contracts in force on transition. Additional disclosures will be required. Practical implications of IFRS 17 transition choices
Operational complexity and cost of IFRS 17 implementation Practical implications of IFRS 17 transition choices
The complexity of the application of the different transition approaches and the cost of transition to IFRS 17 might be different, depending on the availability of information. Generally, for insurance contracts issued a long time before the transition date, the full retrospective approach and the modified retrospective approach will be more expensive to apply. For short-term contracts and contracts issued close to the transition date, more information is likely to be available, and the fair value approach might be more complex and more expensive compared to the alternatives.
Applying IFRS 9 before IFRS 17 Practical implications of IFRS 17 transition choices
IFRS 17 allows an entity that has previously adopted IFRS 9 to revisit the following classifications for financial assets associated with insurance:
- designate assets at fair value through profit or loss; Practical implications of IFRS 17 transition choices
- reassess the business model; or Practical implications of IFRS 17 transition choices
- designate an equity instrument at fair value through other comprehensive income or revoke a previous designation.
An entity should revoke the designation at fair value through profit or loss if doing so no longer eliminates or significantly reduces accounting mismatches at the date of initial application of IFRS 17.