11 January 2021

EU and UK endorsement: the final hurdle

Cintia Cheong charts the endorsement of the IFRS 17 insurance contracts accounting standard in 2020 and explains what happens next

The long-waited amended version of IFRS 17 was finally published in June 2020, much to the delight of many insurers that wanted clarity and certainty from the standard.

Accounting regulators around the world are busy endorsing the amendments set by the International Accounting Standards Board (IASB). For the EU, the European Financial Reporting Advisory Group (Efrag) is now consulting on its assessment of IFRS 17 until the end of January 2021, with the aim of producing its final views by the end of March 2021.

One area needing consensus among Efrag's board members is the annual cohorts requirement. According to Efrag's draft endorsement advice, published in September 2020, nine board members believe the annual cohorts requirement meets its endorsement criteria, whereas seven believe it does not.

The requirement of grouping insurance contracts no more than one year apart has been a major concern for insurers selling contracts with risk sharing between generations or cash flow-matched over different generations. They argue the concept is too complex and costly to implement and it does not reflect the business model of mutualised contracts.

Despite this, the IASB decided to stick to its guns on the requirement. Disappointed with the decision, in July several European insurance trade bodies pressed the issue further in a joint statement and asked the European Commission and members states to find a solution.

What solutions are out there? Efrag's Insurance Accounting Working Group had considered refusing to proceed with endorsement of IFRS 17 if the issue was not fixed, but ultimately rejected the idea.

Critics have raised the possibility of the EU deciding to adopt IFRS 17 but with certain elements removed, a process known as a "carve out", but warned if the EU adopts its own version of the standard, this would be difficult for multinational insurers, with subsidiaries and groups using different versions.

If the European Commission is considering a carve out, it will need to consider how it would work. Some stakeholders have said the carve out should be optional, so insurers can implement the "original" IFRS 17 if they wish.

Given the EU's entire endorsement process is not expected to be completed before the end of the Brexit transition period, the UK has set up its own accounting standards endorsement board. Pauline Wallace, a former board member of the ICAEW and accountant at PwC, has been appointed as chair.

At a webinar organised by the Association of British Insurers in November, Wallace said the UK was aware of the issues of the standard in Europe, and acknowledged the need to get the board up to speed on how those issues are relevant in the UK. A consultation on how IFRS 17 would impact UK organisations ran from September to November 2020.

Wallace said the UK could endorse the standard by Q3 2021, earlier than the EU is likely to achieve.
She said: "The [UK Endorsement] Board itself makes the decisions; we don't have to go through the Efrag process... there is no political decision making in this process. The board will have the delegated powers [by the Department for Business, Energy and Industrial Strategy] to make the decision, assuming those powers have been delegated to us before the third quarter of 2021."

The UK has also set up a Technical Advisory Group (TAG) and appointed experts to share specialised knowledge on IFRS 17. At least two TAG meetings had taken place by early December, InsuranceERM understands.

These debates are unlikely to hold back insurers' implementation projects, as by the end of 2021 they will need to be ready for a "parallel run" of their accounts in 2022, ahead of the 1 January 2023 deadline. But firms may need to maintain flexibility in their programmes, should the EU or UK interpretations diverge from the standard.

 

Channels: 
IFRS 17
People: 
Pauline Wallace