IFRS

Study guides: Exam 6U, Exam CP-321, Exam CP-341, Exam GH-201C, Exam ILA-101, Exam ILA-201I

IFRS (International Financial Reporting Standards) are the accounting standards issued by the International Accounting Standards Board (IASB) and required or permitted for listed companies in many jurisdictions — the EU, the UK, Canada and Australia among them. For insurers the governing standard is IFRS 17 Insurance Contracts, effective for annual periods beginning on or after 1 January 2023, with IFRS 9 for the investments. A U.S. actuary meets IFRS mainly through a U.S. subsidiary reporting to a foreign parent.

\text{LIC} = \text{PV(claim cash flows)} + \text{RA}

• The measurement gap with the U.S. bases. SAP and GAAP carry P&C claim liabilities at an undiscounted estimate with no explicit margin; the IFRS 17 Liability for Incurred Claims (LIC) is discounted at current rates and carries an explicit risk adjustment (RA) whose confidence level is disclosed.
• The premium side. Under the Premium Allocation Approach — available for coverage periods of one year or less, so most P&C business — the Liability for Remaining Coverage resembles unearned premium less deferred acquisition costs; there is no separate DAC asset, and on such contracts acquisition costs may instead be expensed as incurred. An onerous group recognises its expected loss at once.
• Reinsurance is presented gross, as under GAAP and unlike SAP: Reinsurance Contracts Held are a separately measured asset, reduced for the reinsurer's risk of non-performance.
• The income statement replaces written and earned premium with Insurance Revenue, and separates the Insurance Service Result from insurance finance income or expense (the unwinding of discount). Neither SAP nor GAAP makes that split.
• Primary statements (IAS 1; IFRS 18 replaces it for periods beginning on or after 1 January 2027): the statement of financial position, profit or loss and other comprehensive income, changes in equity, cash flows, and notes.
• In the United States, domestic SEC registrants report under GAAP; a foreign private issuer may file IFRS statements as issued by the IASB without reconciling them to GAAP. See Accounting Standards for how the three regimes' objectives differ.

One Claim Liability, Three Regimes A U.S. subsidiary of a European group has unpaid claims with an undiscounted best estimate of \$10{,}000 (thousands), expected to be paid \$5{,}000, \$3{,}000 and \$2{,}000 in each of the next three years, mid-year. The group's IFRS 17 discount rate is 4\% and its risk adjustment is \$400.

Compare the liability on each basis, and describe next year's income effect if claims are paid exactly as expected.

Answer SAP and GAAP both carry the undiscounted \$10{,}000. Under IFRS 17:

\begin{align*}
\text{PV} &= \frac{5{,}000}{1.04^{0.5}} + \frac{3{,}000}{1.04^{1.5}} + \frac{2{,}000}{1.04^{2.5}} \\
&= 4{,}902.90 + 2{,}828.60 + 1{,}813.20 \\
&= 9{,}544.70 \\
\text{LIC} &= 9{,}544.70 + 400 \\
&= 9{,}944.70
\end{align*}

IFRS 17 carries \$55.30 less: the \$455.30 discount is only partly offset by the risk adjustment.

Next year the remaining payments are worth \frac{3{,}000}{1.04^{0.5}} + \frac{2{,}000}{1.04^{1.5}} = 4{,}827.47, so the discount unwinds by 4{,}827.47 + 5{,}000 - 9{,}544.70 = 282.77. That is an insurance finance expense, reported below the insurance service result; the release of risk adjustment as uncertainty expires is a gain within the service result. Under SAP and GAAP the same year shows nothing at all — the claims were paid exactly as reserved.

The Premium Side: UPR, DAC and the LRC At year end an insurer has \$600 of unearned premium on annual policies, fully collected, and \$120 of acquisition costs relating to that unexpired coverage. No group is onerous.

Show the net liability under SAP, GAAP and IFRS 17 (PAA).

Answer

• SAP: unearned premium liability \$600; the \$120 was expensed when incurred. Net liability \$600.
• GAAP: unearned premium \$600 less a DAC asset of \$120. Net liability \$480.
• IFRS 17, costs deferred: the LRC is premium received less unamortised acquisition cash flows, 600 - 120 = \$480, with no separate asset.
• IFRS 17, costs expensed (permitted because coverage is one year or less): LRC \$600.

GAAP and IFRS reach the same equity through different presentation — an asset beside the liability versus a smaller liability — while SAP, and IFRS under the expensing election, hold back the \$120 of equity in the unearned premium. Had the group been onerous, IFRS 17 would add a Loss Component immediately, where SAP and GAAP would test for a premium deficiency reserve.