The End of IFRS 4 (Why do we need a new standard?)

Discover the world of IFRS 17! Before we look at how to account for insurance, we need to know the history. What prompted the accounting fraternity to throw the book at insurance companies completely?

For a long time, insurance companies followed a standard called IFRS 4. The issue is that it was only meant to be a “stop-gap” or temporary placeholder standard when it was issued in 2004. Because it was temporary, this allowed insurance companies in different countries to just keep using their own local accounting rules.

This created several massive problems for the business world:

• The "Apples to Oranges" Problem: If an investor examined the financial statements of a UK Insurance Company compared to those of an Asian Insurance Company, they were looking at two entirely different sets of rules. It was not possible to compare performances accurately. In certain situations, one global company was required to use different rules for its subsidiaries!
• The "Black Box" of Liabilities: Many companies did not update the interest rates or risk assumptions what the long-term contracts were under IFRS 4. They utilized historical figures that are outdated. The insurance company's balance sheet became a “black box” through this, obscuring the current true costs of the company's future liabilities from investors.
• Day 1 Profit Illusion: Under old rules, some companies recorded their profit on the very first day the contract was signed, long before they had actually delivered years of insurance coverage. Under IFRS 17, profit is instead recognized gradually over time as the company provides the insurance coverage and services.

IFRS 17 changes everything. Global uniformity results at last. Insurance companies applying IFRS now must measure their contracts in the same way using current updated assumptions. They are only allowed to recognize profit gradually since they render the insurance service over time.

IFRS 17 makes insurance accounting transparent, contemporary and comparable across the globe by opening the "black box". Now that we understand why the standard exists, the next step is to try to find out who has to use it.