The National Insurance Commission (NAICOM) has insisted that there is no going back on the implementation of the International Financial Reporting Standard (IFRS 17) in 2023 following concerns over loopholes in Nigeria’s approach.
In line with preparation ahead of January 1, 2023 when insurers around the globe are expected to transition from the IFRS 4, the current reporting standard to a novel IFRS 17, Nigeria’s insurance industry regulator has inaugurated sub-working groups of the Insurance Industry Financial Reporting Working Group (IIFRWG) last year.
According to Sunday Thomas, the Commissioner for Insurance, the development issued in May 2017 by the International Accounting Standard Board (IASB) is skewed towards ensuring that an entity provides relevant information that faithfully represents the insurance contracts recognizing the entity’s financial position, financial performance and cash flows.
Mr Thomas, while speaking at the 2021 Insurance Directors’ conference held in Lagos last November, urged board members of each insurance firm to get prepared for the IFRS 17 implementation pointing out that the deadline for migration was already at hand.
Beyond this, analysts say the new reporting standard, when implemented would enhance transparency in financial reporting as well as achieve comparability across the globe as all insurers irrespective of geographical location will be impacted.
Key amendments in IFRS 17
While IFRS 17 will neither change risk structures or insurance operations nor would it alter views about insurers, Fitch analysed that new information or changes in strategy could be credit-relevant. The key areas of changes in financial reportage are:
- Change in presentation style
Over time, insurers have adopted a preference style in reporting and as such, different insurers present varying formats of financial reports for the same period of study leading to inconsistency and lack of uniformity in terms of reportage by insurance companies.
The new standard requires insurers to present a market-consistent style of balance sheet in measuring insurance contracts. In addition, it would allow for the recognition of profit over the period that services are provided.
- Change in equity and financial reporting
A major change for valuation of assets are usually accounted at market values but liabilities are often not. The changes will allow for insurance contract liabilities to be valued at their estimated market value too and also calculated as the present value of future insurance cash flows with a provision for risk.
- Change in the way and manner of profit identification
While profit under the IFRS 4 usually reflects an increase in the first policy years but a lower figure under IFRS 17, going forward, the development would typically be based on IFRS 17 requirements, unlike the accounting policies that are currently applied to insurance contracts under IFRS 4. In other words, profitability may be similar but the timing would vary.
Over the coverage period of the insurance contract, the most fundamental change will involve profits booked in the income statement. Similarly, the Contractual Service Margin (CSM) concept which entails the unearned profit that an entity expects to generate as it provides services will be used for profit recognition in line with the provision of the insurance services under the contract.
- Distributable profits affecting dividend distribution
According to analysis by Fitch, return on equity, return on assets and the combined ratio will remain key ratios in terms of calculating earnings over the lifetime of a contract. However, the parameter value could differ considering separate guidelines for companies switching to IFRS 17.
With the use of new information available under IFRS 17, new financial performance ratios could enhance analysis reflecting a variation on the return on equity and organic capital generation, the net Contractual service Margin, CSM will also increase as an additional earnings component, which could resemble ROE calculated on a current IFRS basis.
- Tax reporting
Tax represents a significant process of financial statement and will be considered with every step along implementing IFRS 17. Expectedly, IFRS 17 will lead to taxation implications on transition and for ongoing calculations that will need to be addressed by insurance entities as well as on indirect taxation.
Bottomline
IFRS 17 is expected to change the accounting system for all entities that issue contracts within the scope of the standard for insurance contracts. With January 1, 2023, as the transition date but early adoption is permitted by the International Accounting Standard Board (IASB).