Disclosure requirements IFRS 4 and IFRS 17

Explanation of recognized amounts from IFRS 4 to IFRS 17

1 Introduction

[IFRS 17 (98), IFRS 17 (93)-(96)]

IFRS 4 requires an entity to disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts. In order to comply with this objective, IFRS 4 outlines what should be disclosed regarding reconciliations, policies, methods and processes but provides limited guidance on how these disclosure requirements should be met.

IFRS 17 requirements are much more extensive. It requires the entity to provide specific reconciliations showing how the net carrying amounts of insurance contracts changed during the period as a result of changes in cash flows and income and expenses recognized in the statement(s) of financial performance.

Most of the disclosure requirements in IFRS 17 relate to both insurance contracts issued (including investment contracts with discretionary participation features where those are within the scope of IFRS 17) and reinsurance contracts held, with the reconciliations to be presented separately for these two categories. However, as the disclosure requirements in the standard are presented from the view of an insurance contract issued, the requirements have to be adapted for the purposes of reinsurance held.

Some of the disclosure requirements in IFRS 17 depend on the measurement model applied for the respective insurance contracts issued or reinsurance contracts held. A summary of the requirements for each measurement model is provided below.

The level of detail required in quantitative reconciliations in IFRS 17 is generally greater than that required by IFRS 4. The new requirements mean that entities will need to prepare new and more granular reconciliations.

The following summary includes comments on the new disclosure requirements in IFRS 17, as well as the major changes from IFRS 4.

Summary disclosures three measurement models

Explanation of insurance amounts under IFRS 17 as applicable to each measurement model

IFRS 17

Disclosures

General
model

Premium
Allocation
approach

Variable
fee
approach

97

Additional disclosures for insurance contracts measured under the PAA – Eligibility for application of the PAA and use of options therein > Clarification

98 -100, 102 – 103, 105

Reconciliations of insurance contract liabilities analysed by the LRC and LIC > Clarification

100 (c) (i) – (iii)

Reconciliations of insurance contract liabilities analysed by the LRC and LIC > Clarification

98 – 99, 101 – 102, 104 – 105

Reconciliations of insurance contract liabilities analysed by measurement components > Clarification

106

Analysis of insurance revenue > Clarification

107 – 108

Impact of contracts initially recognised in the period > Clarification

109

Expected recognition of the CSM (CSM run-off) > Clarification

110

Explanation of insurance finance income or expenses > Clarification

111

Composition of underlying items for contracts measured under the VFA > Clarification

112

Effects of risk mitigation for contracts measured under the VFA > Clarification

113

Effects of change in eligibility for the OCI option for contracts measured under the VFA > Clarification

114

Effects of groups of insurance contracts accounted for at the transition date other than fully retrospectively > Clarification

115

Determination of measurement of groups of insurance contracts at the transition date for those groups accounted for other than fully retrospectively > Clarification

116

Transitional disclosures on the use of the OCI option > Clarification

= Disclosures required
= Disclosures not required or explanations needed

Reconciliations of insurance contract liabilities

SIGNIFICANTLY EXPANDED – [IFRS 17 98 -100, 102 – 103, 105]

Key reporting elements: net liability for remaining coverage and liability for incurred losses

The requirements of IFRS 17 state that the entity shall present a reconciliation from the opening to the closing balance separately for all the following components of the insurance contract liabilities:

The requirements of IFRS 17 specify the components of the insurance contract liabilities to be reconciled, as well as certain line items to be presented in the reconciliations, if applicable.

The reconciliations are required separately for insurance contracts issued and reinsurance contracts held. Reinsurance contracts held cannot be onerous, and therefore, any loss component reconciliation requirement under IFRS 17(100)(b) is not applicable.

Although IFRS 4 requires entities to provide a reconciliation of changes in insurance contract liabilities, those requirements are not as prescriptive and detailed as those required by IFRS 17. Thus, these new and expanded disclosure requirements may prove to be an operational challenge for entities due to the very granular information that needs to be provided showing changes in the insurance and reinsurance balances in the period.

Key reporting elements: Measurement components

[IFRS 17 98 – 99, 101 – 102, 104 – 105] and [IFRS 17 100 (c) (i) – (iii)]

IFRS 17 also requires a reconciliation from the net opening to the net closing balance of the following measurement components of the insurance contract assets or liabilities:

The requirements of IFRS 17 specify the components of the insurance contract liabilities to be reconciled, as well as certain line items to be presented in the reconciliations, if applicable.

The reconciliations are required separately for insurance contracts issued and reinsurance contracts held. This reconciliation is not required for insurance contracts measured the premium allocation approach.

Although IFRS 4 requires entities to provide a reconciliation of changes in insurance contract liabilities, those requirements are not as prescriptive and detailed as those required by IFRS 17. Similar to the requirement above, this disclosure requirement may prove to be an operational challenge for entities due to the very granular information that needs to be provided showing changes in the insurance and reinsurance balances in the period.

Analysis of insurance revenue

NEW – [IFRS 17 106]

IFRS 17 provides a definition of insurance revenue that did not exist previously.

For insurance contracts issued, IFRS 17 requires entities to present an analysis of the insurance revenue recognized in the period. The analysis looks at how changes in the liability for remaining coverage (including expected insurance service expenses, changes in the risk adjustment and the recognition of the contractual service margin in revenue) and the recovery of insurance acquisition cash flows have affected insurance revenue in the period.

This disclosure requirement is not applicable to insurance contracts measured under the premium allocation approach.

Under IFRS 4, insurance revenue is not a defined term, and no disclosures analyzing the composition of insurance revenue are required.

Impact of contracts initially recognized in the period

NEW – [IFRS 17 107 – 108]

IFRS 17 requires entities to disclose the impact of insurance contracts issued and reinsurance contracts held that have been initially recognized in the reporting period presented. The standard requires a separate presentation showing the effect that contracts initially recognized in the period have on:

  • the estimates of the present value of future cash outflows (separately showing the amount of insurance acquisition cash flows);
  • the estimates of present value of future cash inflows;
  • the risk adjustment for non-financial risk; and
  • the contractual service margin.

Furthermore, the standard requires the effects above to be disclosed separately for contracts that have been acquired from other entities (in transfers or business combinations) and for groups of contracts that are onerous.

This disclosure requirement is not applicable to insurance contracts measured under the premium allocation approach.

Expected recognition of the contractual service margin (CSM run-off)

NEW – [IFRS 17 109]

For non-onerous contracts, IFRS 17 requires entities to disclose when the contractual service margin that remains at the end of each reporting period is expected to be recognized in profit or loss. This will provide users with more visibility into an entity’s future profit patterns.

This disclosure shall be separately provided for insurance contracts issued and reinsurance contracts held. This disclosure requirement is not applicable to insurance contracts measured under the premium allocation approach.

Explanation of insurance finance income or expenses

NEW – [IFRS 17 110]

IFRS 17 requires entities to disclose and explain the total amount of insurance finance income or expenses recognized in the period. Specifically, entities shall explain the relationship between insurance finance income or expenses and the investment return on assets.

The objective of the disclosure requirement is to enable readers of financial statements to evaluate sources of finance income or expenses recognized in the period.

Composition of underlying items for contracts measured under the variable fee approach

NEW – [IFRS 17 111]

For contracts measured under the variable fee approach, entities are required to disclose the composition of the underlying items and their fair value.

Effects of risk mitigation for contracts measured under the variable fee approach

NEW – [IFRS 17 112]

For contracts measured under the variable fee approach, entities are required to disclose the effects of risk mitigation (IFRS 17(B115)) on the contractual service margin in the period.

Effects of change in eligibility for the other comprehensive income option for contracts measured under the variable fee approach

NEW – [IFRS 17 113]

For contracts measured under the variable fee approach, entities are required to provide additional disclosures if the entity changes the basis of how it disaggregated insurance finance income or expenses between profit or loss and other comprehensive income because of a change in whether it holds the underlying items. The required disclosures are: the reason why this change is made; the amount of the adjustment for the affected line items; and the carrying amount of the group of insurance contracts to which the change applied.

Effects of groups of insurance contracts accounted for at the transition date other than fully retrospectively

NEW – [IFRS 17 114]

At transition and for all affected subsequent periods, IFRS 17 requires that entities distinguish between the effects of insurance contracts measured using the modified retrospective approach and the fair value approach on the contractual service margin and insurance revenue in the subsequent periods. That is, entities shall show how contracts accounted for not using the full retrospective approach at transition have affected a reconciliation from the opening to the closing balance of the contractual service margin (as disclosed at the level of detail required by IFRS 17(101)(c)) and the amount of insurance revenue (applicable to insurance contracts issued) in the subsequent periods.

This disclosure shall be separately provided for insurance contracts issued and reinsurance contracts held. This disclosure requirement is not applicable to insurance contracts measured under the premium allocation approach.

Determination of measurement of groups of insurance contracts at the transition date for those groups accounted for other than fully retrospectively

NEW – [IFRS 17 115]

In order to provide users with an understanding about the significance of the methods used at transition and the judgments used in determining amounts at transition, the entity shall explain how the measurement of groups of insurance contracts at the transition date was determined. This disclosure is required for all periods in which the above disclosures applying IFRS 17(114) are made.

 Transitional disclosures on the use of the other comprehensive income option

NEW – [IFRS 17 116]

For entities that choose to apply the other comprehensive income option (i.e. to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income), IFRS 17 specifies various transitional measures to determine the effects that should be accounted for in other comprehensive income at the transition date. For such contracts, entities are required to disclose a reconciliation from the opening to the closing balance of the cumulative amounts included in other comprehensive income for financial assets measured at fair value through other comprehensive income related to the groups of insurance contracts. This disclosure is required for all periods in which amounts determined at transition exist.

Additional disclosures for insurance contracts measured under the premium allocation approach – Eligibility for application of the premium allocation approach and use of options therein

NEW – [IFRS 17 97]

For insurance contracts measured under the premium allocation approach, the entity is required to disclose the following:

  • which of the premium allocation approach eligibility criteria it has satisfied;
  • whether it adjusts the liability for remaining coverage and liability for incurred claims for the time value of money and the effect of financial risk; and
  • whether the option to expense insurance acquisition cash flows when incurred was elected.

This disclosure is required for insurance contracts issued and reinsurance contracts held.

Significant judgements in applying IFRS 17

Introduction

IFRS 4 requires entities to disclose information about the amounts presented in their financial statements from insurance contracts. This includes information on:

  • accounting policies for insurance contracts and related assets, liabilities, income and expenses;
  • the process used to determine the assumptions that have the greatest effect on the measurement of the recognised amounts of assets, liabilities, income, expenses and cash flows arising from insurance contracts; and
  • the effect of changes in assumptions used to measure insurance assets and insurance liabilities, showing separately the effect of each change that has a material effect on the financial statements.

IFRS 17 builds on these and the existing requirements in IAS 1 and requires an entity to disclose significant judgements and changes in judgements made in applying IFRS 17.

Inputs, assumptions and estimation techniques

EXPANDED – [IFRS 17(117)]

An entity is required to disclose the methods used to measure insurance contracts and the processes for estimating the inputs to those methods, as well as changes in methods and processes. In addition to this, entities are also required to disclose quantitative information about the inputs, unless this is impracticable.

Specifically, methods and processes that should be described include:

  • the approach used to distinguish changes in estimates of future cash flows that arise from the exercise of discretion from other changes in estimates of future cash flows for insurance contracts measured under the general model (IFRS 17(B98));
  • the approach used to determine the risk adjustment for non-financial risk;
  • the approach used to determine discount rates; and
  • the approach used to determine investment components.

IFRS 4 already sets out certain requirements about policies and processes used for assumptions in measuring insurance contracts. The requirements of IFRS 17 are a development of this.

Methods used to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income

NEW – [IFRS 17(118)]

An entity is required to disclose the methods used to determine the amount of insurance finance income or expenses recognised in profit or loss if the entity applies the other comprehensive income option and disaggregates the total amount between profit or loss and other comprehensive income (IFRS 17(88)(b),(89)(b)).

Confidence level for determining risk adjustment for non-financial risk

NEW – [IFRS 17(119)]

If an entity uses a confidence level approach to determine the risk adjustment for non-financial risk, IFRS 17 requires it to disclose the confidence level assumption used.

If an entity uses another technique for determining the risk adjustment for non-financial risk, IFRS 17 requires it to disclose the technique used as well as the confidence level corresponding to the results of that technique.

From an operational perspective, this disclosure requirement may be challenging if the risk adjustment is not calculated based on a confidence level approach.

Yield curve used to discount cash flows not varying based on underlying items

NEW – [IFRS 17(120)]

IFRS 17 requires the entity to disclose the yield curve or range of yield curves used to discount cash flows that do not vary based on the returns of underlying items. When an entity provides this disclosure in aggregate for a number of groups of insurance contracts, it shall be provided in the form of weighted averages or relatively narrow ranges.

Nature and extent of risks that arise from contracts within the scope of IFRS 17

Introduction

[IFRS 17(121)-(125)]

IFRS 4 requires an entity to disclose information to enable users of its financial statements to evaluate the nature and extent of risks arising from insurance contracts. In order to achieve this, IFRS 4 sets out a number of more detailed requirements that an entity shall disclose in order to comply with this requirement.

IFRS 17 combines the existing requirements on risk disclosures from IFRS 4 and IFRS 7, and entities preparing risk disclosures in accordance with IFRS 17 will recognise a large number of the requirements from the disclosures that are already presented under IFRS 4 and IFRS 7.

Under IFRS 17, an entity shall disclose information that enables users of its financial statements to evaluate the nature, amount, timing and uncertainty of future cash flows from contracts within the scope of IFRS 17. The risks typically expected to arise are insurance risk and financial risks (market risk, credit risk and liquidity risk).

For each type of risk identified, the entity is required to disclose its exposure, how the exposure arises, its objectives, policies and processes for managing the risk and the methods that are used to measure the risk. Any changes in risks or risk management compared to the previous period have to be disclosed.

An entity shall provide both quantitative and qualitative information about its exposure to each of the risks.

Information about effect of regulatory frameworks

NEW – [IFRS 17(126)]

An entity shall disclose information about the effect of the regulatory frameworks in which it operates (for example, minimum capital requirements or required interest-rate guarantees).

Additionally, an entity should disclose when it applies IFRS 17(20) to contract aggregation requirements (i.e. when laws and regulations restrict an entity’s ability to set a different price or level of benefits to certain policyholders with different characteristics).

All types of risk – Concentrations of risk

EXISTING – [IFRS 17(127)]

IFRS 17 requires an entity to disclose information about the concentrations of risk that arise from contracts within the scope of IFRS 17. The requirements include a description of how the entity determines the concentrations and a description of the shared characteristic that identifies each concentration. An example of this could be if the entity provides interest rate guarantees that come into effect at the same level for a material number of contracts.

This requirement is not new compared to IFRS 4 and is not expected to require additional disclosures.

Insurance and market risks – Sensitivity analysis

EXPANDED – [IFRS 17(128)-(129)]

IFRS 17 requires an entity to disclose information about sensitivities to changes in risk variables arising from contracts within the scope of IFRS 17.

The disclosures shall include the effect on profit or loss and equity of reasonably possible changes in the risk variables as well as the methods and assumptions used in preparing the sensitivity analysis and any changes in these compared to previous periods (including the reason for this). Specific requirements are described for insurance risks and market risk separately.

This requirement is not new compared to IFRS 4; however, IFRS 17 specifically requires explaining the relationship between the sensitivities to changes in market risk variables arising from insurance contracts and those arising from financial assets held by the entity.

If an entity uses an alternative sensitivity analysis to manage risks arising from contracts within the scope of IFRS 17, it may use this sensitivity analysis instead of that required above. Additional disclosure requirements are applicable in this case to explain the methods used as well as their objectives and limitations, main parameters and assumptions.

Insurance risk – Claims development

EXISTING – [IFRS 17(130)]

IFRS 17 requires an entity to disclose the amount that best represents the maximum exposure to credit risk as well as information about the credit quality of reinsurance contracts held.

Information about credit risk has previously been required by IFRS 4 and IFRS 7; however, IFRS 17 introduces an explicit requirement to disclose the credit quality of reinsurance contracts held that are assets, which may lead to additional information being disclosed.

Liquidity risk – Other information

EXPANDED – [IFRS 17(132)]

IFRS 17 requires an entity to describe how liquidity risk is managed and disclose a maturity analysis that as a minimum shows t he net cash flows for groups of insurance contracts issued that are liabilities and groups of reinsurance contracts held that are liabilities for each of the first five years and aggregated cash flows beyond that.

The analysis can be provided based on undiscounted net cash flows by estimated timing or on the estimates of the present value of future cash flows by estimated timing. This disclosure is not required for the liability for remaining coverage relating to contracts measured under the premium allocation approach.

An entity shall also disclose any amounts that are payable on demand, explaining the relationship between such amounts and the carrying amount of the related groups of insurance contracts.

Information about liquidity risk has previously been required by IFRS 4 and IFRS 7; however, IFRS 17 introduces explicit requirements regarding the net cash flows from insurance related liabilities and information about amounts payable on demand, which may lead to additional information being disclosed.

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