Today the International Accounting Standards Board (IASB) released the Exposure Draft of the IFRS on insurance contracts. This document follows on from the draft IFRS published in 2010.  FASB is still in the process of drafting their insurance accounting proposals and is expected to issue an ED shortly.

The exposure draft includes the full text of the proposed standard with the amendments that the IASB has made to its previous draft as a result of the feedback received from its constituents. The changes are limited to a number of areas and it is only on those that the IASB has asked questions. The rest of the draft IFRS is deemed final following the due process to date. The IASB has retained its 2010 ED proposal for a single accounting model using a "building blocks" approach for all types of insurance contracts. This approach requires insurers to measure insurance liability by reference to these three building blocks: (a) probability-weighted expected cash flows, (b) risk adjustment liability, and (c) a residual liability representing the unearned profit for the contract, technically termed as the 'contractual service margin'.

The IASB is seeking feedback on the following key issues:

  • measurement proposals (adjusting the unearned profit to reflect changes in cash flows for future services / measuring and presenting cash flows from contracts with contractual link to underlying items);
  • presentation proposals (presenting information on insurance contract revenue / presenting the effects of changes in the liability due to discount rates changes in OCI); and
  • approach to transition (apply standard as if always effective / some simplifications and relief provided).

This exposure draft will be followed by the final standard which is expected to be issued in H2 2014, with a proposed effective date to be approximately three years from the publication of the final IFRS. However, early application is likely to be permitted and comparative information will need to be restated.

The proposed changes will impact the insurance industry more than any previous changes in financial reporting for insurers.

Insurers should use the exposure draft to assess the potential implications for their business, looking specifically at how their profit profile, data, systems and market communications may have to adapt.

This is the first step in the long road to implementation ahead, so insurers will need to take action now to achieve a smooth transition and to prepare investors for the new reporting basis.

Click here to read the Exposure Draft and comment letters.

Francesco Nagari
Francesco is Deloitte's Global IFRS Insurance Leader. He combines extensive IFRS expertise in the field of insurance accounting and capital regulation with international industry knowledge and practical experience on the other issues that affect insurers' financial and solvency reporting.

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