LAM16010 - IFRS 17 Transitional Provisions: Overview: SI2022/1165

Background

IFRS 17 Insurance Contracts (IFRS 17) is a new international accounting standard that changes the way insurance contracts are accounted for. This new standard replaces IFRS 4 Insurance Contracts. It applies to companies reporting under International Accounting Standard (IAS) and is mandatory for periods of account beginning on or after 1 January 2023. Companies reporting under UK Generally Accepted Accounting Practice (GAAP) are not affected by the IFRS 17 change.

IFRS 17 represents a complete overhaul of accounting for insurance contracts, providing consistent principles for all aspects of their accounting. It applies a current value approach to measuring insurance contracts, using updated estimates and assumptions that reflect the timing and any uncertainty of cash flows, and recognises profit as services are provided to policyholders, rather than when premiums are received. It is intended to remove existing inconsistencies and enable investors, analysts and others to meaningfully compare companies and contracts.

Transitional provisions

Depending on the types of insurance business written, a very large one-off transitional accounting profit or loss is predicted for many insurers in the year IFRS 17 is first adopted, which could impact cash flows and have regulatory (Solvency II) implications.

To mitigate this, The Insurance Contracts (Tax) (Change in Accounting Standards) Regulations 2022 (SI2022/1165) introduced a mechanism which spreads over 10 years certain amounts that would otherwise be subject to corporation tax immediately on the adoption of IFRS 17.

The transitional provisions are contained in Part 2 of SI2022/1165. They apply to the long-term business of both insurance companies and composite insurers who report under IAS. ‘Insurance company’ is defined in FA12/S65 and ‘long-term business’ in FA12/S63.

Part 2 of SI2022/1165 does not apply to entities writing only general insurance, or to the general insurance business of composite insurers. Instead, general insurance is subject to the normal change of accounting practice rules - see BIM34045.