After twenty years of development, the International Accounting Standards Board published IFRS 17 ‘Insurance Contracts’ last year and the New Zealand Accounting Standards Board adopted what was issued by IASB the almost word-for-word.
This new standard replaces NZ IFRS 4 ‘Insurance Contracts’ which was an interim measure published in 2004. It is very important to note that this standard is not restricted solely to businesses that are registered as insurance companies with the Reserve Bank of New Zealand. It applies to any company issuing insurance contracts. For example, if a company issues an extended warranty contract beyond the period covered by the Consumer Guarantees Act, that arrangement would satisfy the definition of an insurance contract, and so it should be accounted for as an insurance contract under NZ IFRS 17.
The purpose of this standard is to make it easier for the readers of financial statements to compare and contrast the financial position and financial performance of otherwise similar companies around the world.
The new approach
NZ IFRS 17 solves the comparison problems created by NZ IFRS 4 by requiring all insurance contracts to be accounted for in a consistent manner, benefiting both investors and insurance companies. Insurance obligations will be accounted for using current values instead of historical cost, ending the practice of using data from when a policy was taken out.
The standard introduces insurance contract measurement principles requiring:
- current, explicit and unbiased estimates of future cash flows
- discount rates that reflect the characteristics of the contracts’ cash flows
- explicit adjustment for non-financial risk.
Getting to grips with NZ IFRS 17
NZ IFRS 17 rewrites the rulebook for insurance reporting and will transform data, people, technology solutions and investor relations. Until it becomes operative, we expect the key focus areas for entities in New Zealand to be:
- understanding the financial and operational impacts when transitioning to the standard, and for new business
- implementing efficient data collection and storage solutions, and streamlining production processes and IT systems
- developing and explaining new performance measurement and business steering metrics.
This guide is designed to get you ready for this major new standard. It explains the standard’s key features and provides insights into their application and impact.
NZ IFRS 17 has an effective date of 1 January 2021, but it could be applied earlier.