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Why Kenyan Insurance Firms Struggled With IFRS 17 in 2024:
The Business Daily reported that insurance firms, both listed and unlisted, are yet to submit audited financial statements for the year 2023 by the deadline of April 2024. It transpired that they are struggling with IFRS 17, denying investors and other stakeholders a chance to view the financial health of these firms. Why are they struggling, and what is IFRS 17 all about? This article explains this.
Introduction to IFRS 17:
The implementation of IFRS 17 marks a significant transition for insurance companies, reshaping how they report financial statements and evaluate their financial performance. Developed by the International Accounting Standards Board (IASB) to replace IFRS 4, this new standard establishes a consistent framework for accounting insurance contracts.
Key Principles and Scope
Effective from January 1, 2023, IFRS 17 applies to all insurance contracts, covering life and non-life insurance, as well as reinsurance agreements. The standard introduces critical changes, including:
Measurement Approach: IFRS 17 requires companies to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty related to insurance contracts.
Recognition of Profit Over Time: Unlike previous standards, IFRS 17 requires companies to recognize profit over the period that services are provided under the contract. This means that insurance revenue is recognized as the company earns it, rather than when premiums are received.
Separation of Components: IFRS 17 separates specified embedded derivatives, distinct investment components, and distinct performance obligations from the insurance contracts.
Risk-Adjusted Present Value: Companies recognize and measure groups of insurance contracts at the risk-adjusted present value of future cash flows (fulfillment cash flows). This value incorporates all available information consistent with observable market data.
Contractual Service Margin (CSM): The CSM represents the unearned profit in the group of contracts and is recognized over the period the entity provides insurance contract services.
Disclosure Requirements: Companies must disclose information to enable users of financial statements to assess the effect that contracts within the scope of IFRS 17 have on the financial position, financial performance, and cash flows of an entity.
What is insurance? Watch this video below:
Changes and Impacts
IFRS 17 brings about several key changes and impacts for insurance companies:
Measurement of Liabilities: Embracing a current valuation model, insurers now use the building block approach to measure insurance liabilities. The building block model requires insurers to incorporate the time value of money, risk adjustments, and the fulfillment cash flows expected from insurance contracts.
Consistency and Comparability: Enhancing uniformity in financial reporting, IFRS 17 promotes consistent revenue and expense recognition across the insurance sector. It introduces uniform accounting principles for recognizing revenue and expenses related to insurance contracts.
Increased Disclosures: The standard mandates extensive disclosures, providing stakeholders with comprehensive insights into insurance contract dynamics, such as the nature, amount, timing, and uncertainty of cash flows.
Profit Recognition: Insurance companies will see changes in the timing of profit recognition. Insurance companies now recognize profits over the service period, rather than upfront, ensuring a more accurate depiction of financial performance.
Challenges and Transition
Implementing IFRS 17 poses notable challenges:
Data Collection and Systems: Insurance firms must gather and process large volumes of data to apply the complex calculations required by the standard. This can be resource-intensive and time-consuming, especially for companies with legacy systems.
Actuarial Expertise: The standard requires actuarial expertise to estimate future cash flows, risk adjustments, and discount rates accurately. This may necessitate additional training or hiring of qualified professionals.
IT Infrastructure: Insurers may need to upgrade their IT systems to support the new requirements of IFRS 17, including data storage, processing, and reporting capabilities.
Transition Management: Transitioning from IFRS 4 to IFRS 17 involves substantial effort and coordination. Insurance companies must reevaluate their existing contracts and adjust their financial reporting processes accordingly.
Delays in Reporting
Transitioning to IFRS 17 can cause reporting delays due to:
Complex Calculations: The detailed calculations required by IFRS 17, such as the estimation of cash flows, risk adjustments, and discount rates, can be time-intensive and prone to errors if not properly managed.
Data Challenges: Gathering, validating, and processing the necessary data for IFRS 17 compliance may take longer than anticipated, especially if the data is scattered across multiple systems or lacks standardization.
Resource Constraints: Insurance companies may face resource constraints, such as limited staffing or budgetary constraints, which can slow down the implementation process.
Testing and Validation: Insurers must thoroughly test and validate their systems and processes to ensure compliance with IFRS 17 requirements before finalizing their financial statements. This testing phase can extend the reporting timeline.
Conclusion
IFRS 17 represents a significant change in the accounting practices of insurance companies, aiming to enhance transparency and comparability in financial reporting. However, the implementation of this standard is not without challenges, including data complexities, actuarial expertise requirements, and IT infrastructure upgrades. The shift from recognizing premiums upfront to recognizing revenue over time requires careful planning and adjustments, which could lead to delays in the reporting of financial statements as insurers navigate the transition and ensure compliance with IFRS 17.
Insurers should proactively address these challenges by investing in robust data management systems, enhancing actuarial capabilities, and allocating sufficient resources to the implementation process to minimize delays and ensure a smooth transition to the new accounting standard.
Why Kenyan Insurance Firms Struggled With IFRS 17 in 2024:
The Business Daily reported that insurance firms, both listed and unlisted, are yet to submit audited financial statements for the year 2023 by the deadline of April 2024. It transpired that they are struggling with IFRS 17, denying investors and other stakeholders a chance to view the financial health of these firms. Why are they struggling, and what is IFRS 17 all about? This article explains this.
Introduction to IFRS 17:
The implementation of IFRS 17 marks a significant transition for insurance companies, reshaping how they report financial statements and evaluate their financial performance. Developed by the International Accounting Standards Board (IASB) to replace IFRS 4, this new standard establishes a consistent framework for accounting insurance contracts.
Key Principles and Scope
Effective from January 1, 2023, IFRS 17 applies to all insurance contracts, covering life and non-life insurance, as well as reinsurance agreements. The standard introduces critical changes, including:
What is insurance? Watch this video below:
Changes and Impacts
IFRS 17 brings about several key changes and impacts for insurance companies:
Challenges and Transition
Implementing IFRS 17 poses notable challenges:
Delays in Reporting
Transitioning to IFRS 17 can cause reporting delays due to:
Conclusion
IFRS 17 represents a significant change in the accounting practices of insurance companies, aiming to enhance transparency and comparability in financial reporting. However, the implementation of this standard is not without challenges, including data complexities, actuarial expertise requirements, and IT infrastructure upgrades. The shift from recognizing premiums upfront to recognizing revenue over time requires careful planning and adjustments, which could lead to delays in the reporting of financial statements as insurers navigate the transition and ensure compliance with IFRS 17.
Insurers should proactively address these challenges by investing in robust data management systems, enhancing actuarial capabilities, and allocating sufficient resources to the implementation process to minimize delays and ensure a smooth transition to the new accounting standard.