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As a reminder, there is no front-end loading of reported profits under IFRS 17.
IFRS 17 is based on the concept that profit is only recognised when the associated service is provided. Consequently, unearned profit for insurance services —the contractual service margin—is presented as part of the insurance contract liability on the insurer’s balance sheet.
On the other hand, losses for insurance services will flow through the insurer’s income statement as soon as expected by the insurer.
The requirements for determining the unit of account in IFRS 17 reflect the economic practice of the insurance industry. When insurers apply IFRS 17 in 2021, insurers will account for the contracts with their customers on an aggregated basis rather than on a contract-by-contract basis.
Other IFRS Standards generally specify the accounting for an individual contract to provide the most transparent information for each contract.
The unit of account was a controversial issue during the development of IFRS 17 because it affects the timing of recognition of profit for insurance services.
The unit of account, however, does not change the total profit recognised over the life of a contract or the fulfilment cash flows of insurance contracts. For the fulfilment cash flows, insurers can estimate expected cash flows at any level—contract level, portfolio level or group level—and then allocate those expected cash flows to different groups of contracts.
The unit of account matters for determining the pattern of profitability. It aims to ensure that trends in the profitability of a portfolio of contracts are reflected in the financial statements of insurers in a timely way, by reporting profit when the insurance coverage is provided and losses as soon as it becomes apparent that losses are expected.
At the same time, the unit of account provides cost relief to insurers and a better reflection of the insurance economic practice, by allowing them to group insurance contracts for measurement purposes, based on the characteristics of the contracts and the insurers’ approach to managing them.