After 13 years, a new global accounting standard for insurance contracts has been issued by the International Accounting Standards Board (IASB).

IFRS 17 will replace IFRS 4, which was an interim measure that resulted in insurers using different accounting standards.

“As a consequence, it is difficult for investors to compare and contrast the financial performance of otherwise similar companies,” IASB Chairman Hans Hoogervorst said.

“IFRS 17 replaces the current myriad of accounting approaches with a single approach that will provide investors and others with comparable and updated information.”

The standard will take effect on January 1 2021, and will affect 450 listed insurers using IFRS standards.

“IFRS 17 solves the comparison problems created by IFRS 4, by requiring all insurance contracts to be accounted for in a consistent manner,” Mr Hoogervorst said.

“Insurance obligations will be accounted for using current values, instead of historical cost.”

The standard will mean insurers use consistent accounting in insurance contracts, rather than different standards depending on the countries in which they operate.

This will mean significant changes for multinational insurers.

Currently, some insurers treat cash or deposits as revenue, but under IFRS 17 revenue will reflect the insurance coverage provided, excluding any deposits.

The new standard will also require insurers to measure contracts at current value.

Insurers will have to measure contracts based on the obligations created by policies.

They will also be required to provide consistent information about components of current and future profits from contracts.

Some observers warn implementing the new standard will not be easy.

“While IFRS 17 doesn’t come into effect for another few years, insurers are likely to start feeling its impact much sooner,” EY Oceania Insurance Leader Grant Peters said.

“The new requirements will make understanding reported profit, and how it has moved between reporting periods, more challenging,” Mr Peters said. “Decisions made by insurers at the date of transition to the new standard will have a significant impact on future profitability.”

He says insurers will have to examine and understand the standard’s implementation and how this will apply to contracts.

“A process that will take significant time and effort,” he said. “Understanding the commercial impact of IFRS 17 will be important, as will reconciling reported results and equity with the equivalent numbers computed under other regulatory and reporting frameworks.”

Willis Towers Watson Senior Consultant John Nicholls says IFRS 17 is more than just an accounting change.

“It will have a wide and significant impact on insurers’ operations,” he said. “The new standard will impact profit, equity and volatility, as well as reserving and financial reporting processes, actuarial models, IT systems and potentially executive remuneration.”

“Insurance companies should not underestimate the work required.”