IFRS 17 is a principles-based accounting standard and allows for alternative accounting treatments. Under IFRS 17, changes in financial assumptions can alternatively be routed through Other Comprehensive Income (OCI) (for GMM contracts), instead of the Profit and Loss account, reducing volatility
Presently, losses under lossmaking (onerous) contracts are cross-subsidized against profitable contracts, but under IFRS 17, there is the requirement to identify onerous contracts separately and also recognize the losses immediately in profit and loss account.
|Timing of Event||Event||Debit Account||Credit Account|
|Initial recognition||Insurance contract initial recognition (Onerous and non-onerous)||Insurance contract liabilities—PV of Inflow||Insurance contract liabilities—PV of outflow: insurance component|
|Insurance contract liabilities—RA|
|Insurance contract liabilities—PV of outflow: investment Component|
|Loss component of the liability||Insurance contract liabilities—CSM|
|Initial recognition||Loss component recognition||Insurance service expense—loss on onerous contracts||Loss component of the liability|
The first sample entry above is for recognition of an insurance contract. The respective amounts for each contract/cohort need to come from the CSM engine. As there could be reversal of CSM or reversal of the loss component at any point, one way to handle such situation would be to have entries that have both CSM and Loss component in the same entry. Similar entries need to be passed for changes to future service liabilities and that impact the CSM/Loss component. Also, as required by the standard, the loss component is immediately realized as an expense (and subsequently moved to Profit and Loss account)
When applying the new standard to reinsurance contracts, there will be challenges like differences in contract boundaries, CSM release pattern that will have to be dealt with.