Overcoming the ambiguity of IFRS 17

Overcoming the ambiguity of IFRS 17

The highly anticipated IFRS 17 has arrived on financial institutions doorsteps! Arguably IFRS 17 is an historic, updated reporting standard which is set to revolutionise the accounting of contracts across the insurance industry, as we have never seen before. With the standard being released earlier this year many industry professionals have begun the vitally important task of deciphering and interpreting the new publication. At this stage of development various questions have been raised regarding the technicalities of the standard and how to move ahead towards implementation. Although full implementation may seem like the distant future industry professionals must now lay the foundations in planning and preparing for the 2021 deadline.

With IFRS 17 quickly becoming an industry wide challenge the Center for Financial Professionals conducted extensive research with a multitude of industry experts to identify the most current and critical topics surrounding IFRS 17. The results of this study provided an insight into various financial institutions and their concerns and interest within IFRS 17. Some of the key themes produced have been highlighted below.

During research several industry experts, all of which were actively seeking to implement IFRS 17, produced a clear theme of concern. This related to uncertainty surrounding the transition from IFRS 4 to IFRS 17, in particular ambiguity around the standard, implementation timelines and general impacts on the business. As the standard was only published a few months ago many of these questions simply have no answer. As previously mentioned many FI’s will now be breaking down the standard and placing their own value on the text. However research suggested that the variations in interpretation across the industry could largely impact the ability to create a common reporting language. Comments were also made regarding IFRS 17 timelines and institutional preparedness for full implementation. This uncertainty could mean that each organisation is working to a different schedule with different implementation goals. A majority of professionals agreed that the industry must work together to limit variations in interpretation, and have a shared consensus on implementation and timelines.

Another key area of concern included the impacts of IFRS 17 on profits and the ability to effectively communicate these changes to shareholders, stakeholders and the market. Due to the core structure of IFRS 17 it is highly anticipated that reported profits will appear differently than they have done previously. This change is accepted across the industry, however the challenge comes in the ability to effectively communicate and explain this volatility whilst maintaining share price. A key concern raised by several industry professionals included the potential threat that stakeholders may not recognise or understand the full implications of IFRS 17. Therefore many may interpret the variation in reported profits as a downfall of the firm and lose stakeholder confidence. Ultimately IFRS 17 could create an undesirable environment in which some FI’s lose market value, in order to avoid this eventuality a majority of firms must now begin the vitally important process of educating employees, stakeholders and shareholders on the predicted impacts of IFRS 17. Effectively communicating the anticipated volatility and re-affirming business stability now will be essential to secure future trust and confidence. It was suggested that profit messaging is one of the most complex challenges surrounding IFRS 17 in the coming months. Identifying solutions now and preparing well in advance could avoid future market volatility.

And lastly another key area of interest was the ability to leverage Solvency II resources, systems and knowledge to effectively implement IFRS 17. Understandably Solvency II was a huge undertaking and required dramatic internal changes, therefore the ability to salvage and convert some of this effort into IFRS 17 implementation would be a practical and efficient solution. Several industry experts claimed that this plan of action would minimise duplication of efforts and allow linkages between the two standards. In theory, this sounds an ideal solution, however, in practice we must now consider if it is viable. Knowledge obtained from research suggested that many FI’s will now be conducting a gap analysis between the two standards to identify similarities and differences. From this point it can then be explored what can be leveraged to make IFRS 17 implementation a smoother process. Arguably this comparison of the two standards should also allow for improved continual management of Solvency II once IFRS 17 has been implemented. It is anticipated that within the coming months more information will be produced on what can and cannot be transferred from Solvency II into IFRS 17.

From this point on IFRS 17 will be at the forefront of industry professional’s minds as we visualise and prepare for the 2021 finish line. Undoubtedly this is an exciting time within the IFRS 17 implementation path as we set the stage for future expectations and requirements. As mentioned uncertainty surrounding the standard, timelines, profit messaging and leveraging Solvency II will be areas of high debate and discussion in the coming months. With the present challenges and the task ahead the industry must work together and collaborate in order to make progress. At this early stage of development encouraging active discussion across the industry may be the key to IFRS 17 success.
The Center for Financial Professionals will assess IFRS 17 transition from review and analysis to implementation at this year’s IFRS 17 Forum taking place on 29 November in London. Several of the industry’s leading professionals will be joining us to deliver their insights into IFRS 17. This will be a fantastic opportunity to network with like-minded peers and participate in our interactive sessions. To find out more or to register for the upcoming event please call +44 (0) 207 164 65 82 or email shannon.harris@cfp-events.com