While 2022 has been quiet in terms of new accounting standards or amendments being issued by the International Accounting Standards Board (IASB), financial statement preparers should start getting ready for some significant changes that will become effective in 2023, specifically IFRS 17, Insurance Contracts.

The following summarizes highlights of standards or amendments that are effective for annual periods beginning on or after January 1, 2023.

IFRS 17, Insurance Contracts

In May 2017, the International Accounting Standards Board (IASB or the Board) issued IFRS 17, Insurance Contracts, which replaces IFRS 4, Insurance Contracts. This standard sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts that are within the scope of IFRS 17. In June 2020, the IASB issued Amendments to IFRS 17, which addresses concerns and implementation challenges that were identified after IFRS 17, Insurance Contracts, was published in 2017. The amendments are effective for annual periods beginning on or after January 1, 2023.

IFRS 17 replaces IFRS 4, Insurance Contracts, effective for annual reporting periods beginning on or after January 1, 2021. IFRS 17 provides the first comprehensive guidance on accounting for insurance contracts (including insurance or reinsurance contracts issued and reinsurance contracts held) under IFRS. This standard not only aims to increase transparency but also comparability, as it will reduce diversity in the accounting practices for insurance contracts.

IFRS 17 requires fundamental accounting changes to how insurance contracts are measured and accounted for. It introduces the general measurement model, based on a risk-adjusted present value of future cash flows that will arise as the insurance contract is fulfilled. This new measurement model aims to provide relevant information of the future cash flows. The general measurement model is modified for the measurement of reinsurance contracts held, direct participating contracts, and investment contracts with discretionary participation features. Also, while the general measurement model applies to all groups of insurance contracts in scope of IFRS 17, a simplified approach (a premium allocation approach) may be used to measure contracts that meet certain criteria.

The implementation efforts for IFRS 17 vary depending on the systems, methods, and data storage capabilities currently used by the company to track insurance contract information, to account for, to report, and to disclose relevant information. Many of the legacy systems may not be capable of accommodating the new data needed for IFRS 17 implementation, requiring upgrades on systems and processes. For instance, applying the general measurement model will require a company to track historical discount rates to determine the present value of estimates of future cash flows. Also, at each reporting period, the company applying IFRS 17 would require significant effort, processes, and controls to measure and remeasure its estimates using most current assumptions. Companies applying IFRS 17 will have to develop or upgrade controls around its business, systems, and process changes.

IFRS 17 also includes new disclosure requirements, providing more clarity and transparency for users of financial statements.

Certain issuers will benefit from a temporary exemption from IFRS 9, Financial Instruments, until IFRS 17 is effective. IFRS 9 addresses the accounting for financial instruments and is effective for annual reporting periods beginning on or after January 1, 2018. However, for insurers meeting the eligibility criteria, IFRS 4 provides a temporary exemption which permits them to continue to apply IAS 39, Financial Instruments: Recognition and Measurement, rather than implement IFRS 9. This temporary exemption was applicable to annual reporting periods beginning before January 1, 2021. However, in June 2020, the IASB published an amendment to IFRS 4 to extend the temporary exemption from applying IFRS 9 until annual reporting periods beginning before January 1, 2023. This amendment maintains the alignment of the effective dates of IFRS 9 and IFRS 17.

With the implementation of IFRS 17, the accounting for insurance contracts will significantly differ between IFRS and the U.S. Generally Accepted Accounting Principles (U.S. GAAP) for both the insurers, reinsurers, and non-insurers.

Amendments to IAS 1

Classification of Liabilities

On March 23, 2020, the IASB issued Classification of Liabilities as Current or Non-current (Amendments to IAS 1). The amendments were originally effective for annual reporting periods beginning on or after January 1, 2022; however, their effective date has been delayed to January 1, 2024.

This amendment to IAS 1 clarifies that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement at the reporting date. Such right needs to exist at the reporting date and must have substance. The amendments also clarify that the transfer of a company’s own equity instruments is regarded as settlement of a liability unless it results from the exercise of a conversion option meeting the definition of an equity instrument.

Disclosure of Accounting Policies

On February 12, 2021, the IASB issued Disclosures of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2) with amendments that are intended to help preparers in deciding which accounting policies to disclosure in their financial statements.

The amendment continues the IASB Board’s clarification on applying the concept of materiality. These amendments will also help companies in providing useful accounting policy disclosures, including:

1. Requires disclosing of the company’s material accounting policies rather than their significant accounting policies
2. Clarifies that accounting policies related to immaterial transactions, events, or conditions that are immaterial do not need to be disclosed
3. Clarifies that not all accounting policies that related to material transactions, events, or conditions are themselves material

IFRS Practice Statement 2 was also amended to include guidance and examples on application of materiality to accounting policy disclosures.

The amendments are effective for annual periods beginning on or after January 1, 2023.

Amendments on IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors

Entities apply IAS 8 when selecting and applying accounting policies, accounting for changes in estimates, and/or accounting for corrections of prior period errors. While this standard provides guidance on developing accounting policies for items that result in relevant and reliable information, the standard requires entities to first comply with any specific IFRS applying to a transaction. The standard also provides that changes in accounting policies and corrections of errors are generally accounted for retrospectively, while changes in accounting estimates are generally accounted for on a prospective basis.

On February 12, 2021, the IASB issued Definition of Accounting Estimates (Amendments to IAS 8) to help entities to distinguish between accounting policies and accounting estimates. The amendments clarify how companies distinguish changes in accounting policies from changes in accounting estimates, with a primary focus on the definition of and clarifications on accounting estimates. The distinction between the two is important because changes in accounting policies are applied retrospectively, while changes in accounting estimates are applied prospectively.

The amendments further clarify that accounting estimates are monetary amounts in the financial statements and are subject to measurement uncertainty. The amendments also clarify the relationship between accounting policies and accounting estimates by specifying that a company develops accounting estimates to achieve the objective set out by an accounting policy.

The amendments are effective for annual periods beginning on or after January 1, 2023. Early application is permitted.

Amendments to IAS 12, Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction

The IASB issued on May 7, 2021, the Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction (Amendments to IAS 12), which clarifies how companies shall account for deferred tax on transactions such as leases and decommissioning obligations, with a focus on reducing diversity in practice.

Under IAS 12, a comprehensive balance sheet method of accounting for income taxes is used, whereby both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities are recognized. With limited exceptions, the differences between the carrying amount and the tax base of assets and liabilities and carried-forward tax losses and credits are recognized as deferred tax liabilities or deferred tax assets. Deferred tax assets are also being subject to a “probable-profits” test.

The amendments narrow the scope of the initial recognition exemption so that it does not apply to transactions that give rise to equal and offsetting temporary differences. As a result, companies will need to recognize deferred tax assets and a deferred tax liability for temporary differences arising on initial recognition of a lease and a decommissioning provision.

The amendments to IAS 12 are effective for annual periods beginning on or after January 1, 2017, but earlier application is permitted. Further amendments to IAS 12 are effective for annual reporting periods beginning on or after January 1, 2023. Early adoption is permitted.

Note that the amendments to IAS 12 align the accounting for deferred taxes that arise at inception of a lease or decommissioning provisions with respect to asset retirement obligations (ARO) with U.S. GAAP.

Further reminder: To comply with IFRS, companies also need to timely implement all IFRS Interpretations Committee agenda decisions. Accordingly, we highly suggest the preparers of the financial statements under IFRS also refer to these decisions.

Originally published in Bloomberg Tax