What are the lessons learnt so far from implementation?
In most cases, the biggest lesson is that organizations will not know how IFRS 17 will work until the first time that they produce the numbers. Those insurers that have done dry runs have been very surprised that the numbers produced do not always make sense. Some of the larger life insurance companies have found that it is only when they get to the third dry run that they start to understand the numbers being produced. It is critical to make sure that the IFRS 17 numbers are stabilized as soon as possible. Companies may find this challenging because the implementation has taken longer than planned, but further delay may cause more issues later.
A second key lesson is to consider that the numbers will need to be audited, and this will take additional time and resources. A consensus appears to be emerging that in Q3 or Q4 of 2022, companies will start releasing information to the market about the expected impact on the effective date (1 January 2023), followed by information on opening balance sheets and comparative numbers under IFRS 17 in Q1 2023. Companies need to focus on ensuring there is enough time to produce and understand this information and for the numbers to be audited before publication.
Other factors to consider include allowing sufficient contingency time in the implementation process if things go wrong. As the implementation date draws closer, some companies are finding that the first reported numbers may need to be produced using workaround solutions, and that additional time after implementation needs to be factored in to improve and automate the production process. This is something that was seen with IFRS 9 implementations in other industries in 2018. Companies are also finding that often, it is not possible to buy a single vendor solution that will facilitate the application of IFRS 17. This consequently impacts the entire system’s architecture, including the consolidation system, the policy administration system and actuarial models.
There is still some uncertainty about the requirements of IFRS 17 and how they should be implemented; some areas are still open to interpretation. The standard was issued in 2017, but then amended in 2020 as a result of the issues that were encountered in implementation. Companies need to be ready to change something that may have already been implemented in their systems and processes as interpretations and practices evolve.
What have regulators said so far?
Globally, the extent to which regulators are involved in IFRS 17 varies widely. Some jurisdictions, particularly in Asia-Pacific and Canada, will have regulatory reporting based on IFRS 17, and in those cases, the regulators have been very active. For example, in Korea, the regulator requires insurers to be ready to report IFRS 17 numbers even before the effective date of the standard. This has driven insurers in that market to be well advanced in their implementation. By contrast, in Europe, regulatory capital is governed by different rules from IFRS 17. In some countries, such as those in the European Union (EU) and the United Kingdom (UK), the standard requires endorsement before companies can apply it in their financial statements, which may result in some differences compared to IFRS 17 as issued by the IASB (which already proves to be the case for the EU).
Regulators are very keen to have consistent, high-quality implementation of the standard and high-quality audits. They would like companies to follow the same approach to standardize implementation around the world. Some regulators may consider prescribing that the standard is implemented in a particular way, for example, limiting the options available in IFRS 17 within their jurisdiction.
What are audit committees focusing on?
Audit committees will need to ensure they are comfortable with the numbers when the IFRS 17 financial statements are issued for the first time. Audit committees should be comfortable with the implementation plans, management’s progress with the plans and the accounting judgments made. Companies may not have a lot of time to understand and explain the numbers and audit committees may not have previous experience to be able to compare them. There are likely to be a lot of manual processes and controls around the first set of financial statements, which could create a greater risk for audit committees.