IFRS 17 was issued by the IASB in May 2017 and effective from the period starting on or after 01 January 2023. This standard is generally acclaimed to be the most complex accounting standard issued by the Board. Before now, Insurance contracts underwritten in different parts of the world are treated differently based guidance issued by induatry regulators. However, this made comparability of insurance companies financial statements across different jurisdictions (and across industries) extremely difficult. This new standard has therefore provided harmony, comparability and consistency to insurance accounting globally. This inadvertently means that there’s a lot of change to deal with by every entity who issues insurance contract. It does not only change the profit recognition over the time, it also changes the measurement of liabilities, the exposure insurance risks and overall outlook of the income statement. The resultant implication of IFRS 17 on operations and IT system of insurance companies are extremely huge. I’m still worried about the capacity of Nigeria insurance industry to cope with the financial implication.

Understanding the scope of IFRS 17 is sacrosanct because it is useless to gather enormous data and build complex models when the transaction is in effect not within the scope of a standard. Imagine a Doctor treating body rashes as leprosy! This is exactly the problem that arises when a wrong standards is applied to the treatment of a transaction.

Now, before we dive deeper into talking about the scope of IFRS 17, we need to first look at how the Board defines insurance contract. An insurance contracts, according to IFRS 17, is a contract whereby one party, the insurer, accepts significant insurance risks from another party, the insured or policyholder, against an uncertain future event that could have an adverse effect on the policyholder, and agrees to compensate (or indemnify) the policyholder if such an insured event occurs. This definition is not different from what we have under IFRS 4 and it applies to all insurance contracts issued (this could be by an insurance company or any other entity whatsoever).

Contracts within the scope of IFRS 17

1. Insurance contracts issued (whether life or non-life).

2. Reinsurance contracts issued or held (whether life or non-life).

3. Insurance contracts with direct participation features.

4. Investment contracts with discretionary participation features. However, this is only applicable if the issuer also issues other insurance products.

5. Loans issued by banks whereby it is within the contract that repayment would be waived upon death of the holder. Only if it carries significant insurance risk..

6. Equity release mortgages issued by banks with the intention of recouping the principal and interest through sale of the property upon the death of the holder of the instrument or when the holder moves into long-term care. Here, contrary to IFRS 4, it will likely be difficult to unboundle this product (i.e separate the insurance and financial instrument components), rather the whole product would be accounted for under IFRS 17.

Contracts scoped out of IFRS 17

1. Insurance contracts held i.e insurance contract in which the entity is the policyholder (with the exception of reinsurance contracts held as mentioned above).

2. Warranties issued by manufacturer, dealer or retailer (covered under IAS 37 and IFRS 15).

3. Pensions scheme’s planned assets and defined benefit obligations (covered under IAS 19).

4. Contingent consideration (payable or receivable) arising from a business combination (covered under IFRS 3).

5. Residual value gurantees issued by manufacturers or retailers. This is common under lease arrangements (covered under IFRS 15 or IFRS 16). However, this will be treated as an insurance contract if the guarantee is issued by a third party who’s in the business of issuing similar contracts and treats them as insurance contract.

6. Insurance coverage provided by an issuer of credit cards (or any similar contract). For example when a credit card company accepts to compensate the card holder for losses suffered if the supplier of a good, paid for using the card, did not discharge his/her responsibility under the contract.

7. Contractual rights or obligations contingent upon future use of a non-financial asset e.g licences or royalties (covered under IFRS 15, IFRS 16 and IAS 38). However standalone residual value gurantee with significant insurance risks are to be treated under IFRS 17.

8. Any forms of financial gurantee are scoped out of this standard. This type of contracts are considered to be speculative in nature and does not bear significant insurance risk.

9. Embedded derivatives associated with hedging of financial risks (covered under IFRS 9). In fact, embedded derivatives associated with an insurance contract must not be comingled together, it must be separated and treated differently.

Note, a very interesting subject is the issue of the Fixed Fee Service contract whereby an entity could elect to treat the contract under IFRS 15 or IFRS 17. A fixed fee service contract is where, for example, a customer has a standing agreement with a maintenance company to repair its machine anytime it breaks down. This service is usually at a fixed and predetermined fee agreed upon at the inception of the contract. However these conditions must be met before IFRS 17 can be applied.

a. If the adverse risk does not impact the agreed price.
b. If the insurance arises primarily from the use of the service.
c. This must be a service rendered and not cash reimbursement

In conclusion, it is important to consider properly the treatment of a particular transaction to ensure it falls within the scope of IFRS 17 before applying the provisions of the standard. This is the first and most important step. However, this is just the beginning of a long journey towards understanding the nitty-gritty of IFRS 17, Insurance Contract. You will need to research further about the recognition, measurement, presentation and disosure requirements of the standard.