means in the context of restatement of prior periods following a change in accounting
policy is discussed in Chapter 3 at 4.7.
The Board permitted these alternative options to the full retrospective approach on the
grounds that measuring the remaining amount of the contractual service margin for
contracts acquired in prior periods, as well as the information needed in the statement
of financial performance in subsequent periods, was likely to be challenging for
preparers. This is because these amounts reflect a revision of estimates for all periods
after the initial recognition of a group of contracts. [IFRS 17.BC377]. In the Board’s opinion,
measuring the following amounts needed for retrospective application would often be
impracticable: [IFRS 17.BC378]
• the estimates of cash flows at the date of initial recognition;
• the risk adjustment for non-financial risk at the date of initial recognition;
• the changes in estimates that would have been recognised in profit or loss for each
accounting period because they did not relate to future service, and the extent to which
changes in the fulfilment cash flows would have been allocated to the loss component;
• the discount rates at the date of initial recognition; and
• the effect of changes in discount rates on estimates of future cash flows for
contracts for which changes in financial assumptions have a substantial effect on
the amounts paid to policyholders.
The choice of applying either a modified retrospective approach or a fair value
approach exists separately for each group of insurance contracts when it is
impracticable to apply IFRS 17 retrospectively to that group. An entity is permitted to
use either of these two methods although use of the modified retrospective approach is
conditional on the availability of reasonable and supportable information. [IFRS 17.C6(a)].
Within the two permitted methods there are also measurement choices available
depending on the level of prior year information. Consequently, there is likely to be
considerable diversity of practice across entities in calculating the contractual margin at
transition date. In turn, this will result in potentially different releases of the contractual
4600 Chapter 52
service margin (i.e. different profit) for similar types of contract in subsequent
accounting periods. The Board has acknowledged that the choice of transition methods
results in a lack of comparability of transition amounts. [IFRS 17.BC373]. This explains why
the Board included a requirement for disclosures that track the effects of the modified
retrospective approach and the fair value approach on the contractual service margin
and insurance revenue in future periods (see 16.1.5 above).
An overview of the transition methods is illustrated below:
DECIDED TRANSITION METHOD BY GROUP OF CONTRACTS
Full retrospective approach (apply IAS 8)
For each group, if impracticable
Modified retrospective approach
or
Fair value approach
• Modifications available if
necessary given reasonable and
supportable information
• Maximise the use of the
information needed for full
retrospective approach
17.2.1
Disclosures about the effect of transition
At transition to IFRS 17, entities should provide the disclosures required by IAS 8
applicable to changes in accounting policies apart from the exemption discussed above
(i.e. there is no requirement to present the amount of the adjustment resulting from
applying IFRS 17 affecting each financial line item to either the current period or each
prior period presented, or the impact of applying IFRS 17 in those periods on earnings
per share).
IAS 8 requires the following disclosures upon initial application of an IFRS: [IAS 8.28]
• the title of the IFRS (i.e. IFRS 17);
• a statement that the change in accounting policy is made in accordance with the
transitional provisions;
• the nature of the change in accounting policy;
• where applicable, a description of the transitional provisions (which means that an
entity would need to explain whether and how it had applied the retrospective,
modified retrospective and fair value approaches);
Insurance contracts (IFRS 17) 4601
• when applicable, the transitional provisions that might have an effect on future periods;
• the amount of any adjustment relating to periods prior to the accounting periods
prior to those presented in the financial statements, to the extent practicable; and
• if retrospective application is impracticable, the circumstances that led to the
existence of that condition and a description of how and when the change in
accounting policy is consistently applied.
In addition, as discussed at 16.1.5 above, entities are required to provide disclosures to
enable users of the financial statements to identify the effects of groups of insurance
contracts measured at transition date applying the modified retrospective approach or
the fair value approach on the contractual service margin in subsequent periods. This
information is provided in the form of reconciliations. In all periods for which
disclosures are made for those contracts which used the modified retrospective or fair
value approach on transition, an entity should continue to explain how it determined
the measurement requirements at transition date.
17.3 The modified retrospective approach
This approach contains a series of permitted modifications to retrospective application
as follows: [IFRS 17.C7]
• assessment of insurance contracts or groups of insurance contracts that would have
been made at the date of inception or initial recognition – see 17.3.1 below;
• amounts related to the contractual service margin or loss component for insurance
contracts without direct participation features – see 17.3.2 below;
• amounts related to the contractual service margin or loss component for insurance
contracts with direct participation features – see 17.3.3 below; and
• insurance finance income or expenses – see 17.3.4 below.
An entity is permitted to use each modification listed above only to the extent that it
does not have reasonable and supportable information to apply the retrospective
approach. [IFRS 17.C8].
The objective of the modified retrospective approach is to achieve the closest outcome
to retrospective application possible using reasonable and supportable information
available without undue cost or effort. Accordingly, in applying this approach, an entity
should: [IFRS 17.C6]
• use reasonable and supportable information. If the entity cannot obtain reasonable
and supportable information necessary to apply the modified retrospective
approach, it should apply the fair value approach; and
• maximise the use of information that would have been used to apply a fully
retrospective approach, but need only use information available without undue
cost or effort.
‘Undue cost and effort’ is not defined in IFRS. However, the IFRS for Small and Medium-
sized Entities states that considering whether obtaining or determining the inform
ation
necessary to comply with a requirement would involve undue cost or effort depends on
the entity’s specific circumstances and on management’s judgement of the costs and
benefits from applying that requirement. This judgement requires consideration of how
4602 Chapter 52
the economic decisions of those that are expected to use the financial statements could
be affected by not having that information. Applying a requirement would involve undue
cost or effort by a Small and Medium sized entity (SME) if the incremental cost (for
example, valuers’ fees) or additional effort (for example, endeavours by employees)
substantially exceed the benefits those that are expected to use the SME’s financial
statements would receive from having the information. The Basis for Conclusions to the
IFRS for SMEs further observes that:
• the undue cost or effort exemption is not intended to be a low hurdle. This is
because an entity is required to carefully weigh the expected effects of applying
the exemption on the users of the financial statements against the cost or effort of
complying with the related requirement. In particular, the IASB observed that it
would expect that if an entity already had, or could easily and inexpensively
acquire, the information necessary to comply with a requirement, any related
undue cost or effort exemption would not be applicable. This is because, in that
case, the benefits to the users of the financial statements of having the information
would be expected to exceed any further cost or effort by the entity; and
• that an entity must make a new assessment of whether a requirement will involve
undue cost or effort at each reporting date.45
The IASB’s Conceptual Framework also notes that although cost is a pervasive
constraint on the information provided by financial reporting and that the cost of
producing information must be justified by the benefits that it provides, the cost is
ultimately borne by the users (not the preparers) and implies that any cost constraint
should be seen from a user’s viewpoint. See Chapter 2 at 2.5.3.
17.3.1
Assessments at inception or initial recognition
When it is impracticable for an entity to apply the retrospective approach, an entity
should determine the following matters using information available at the transition
date: [IFRS 17.C9]
• how to identify groups of contracts (see 5 above);
• whether an insurance contract meets the definition of an insurance contract with
direct participation features (see 11 above); and
• how to identify discretionary cash flows for insurance contracts without direct
participation features (see 8 above).
To apply IFRS 17 retrospectively, an entity needs to determine the group of insurance
contracts to which individual contracts would have belonged on initial recognition.
IFRS 17 requires entities to group only contracts written within one year. [IFRS 17.BC391].
The IASB considered that it may not always be practicable for entities to group
contracts written in the same one year period retrospectively. [IFRS 17.BC392].
Consequently, in aggregating contracts when it is impracticable to apply a retrospective
approach, an entity is permitted (to the extent that reasonable and supportable
information does not exist) to aggregate contracts in a portfolio issued more than one
year apart into a single group. [IFRS 17.C10]. This may mean that a single group of, say,
term life contracts, could span many years to the extent reasonable and supportable
Insurance contracts (IFRS 17) 4603
information would not be available to aggregate the contracts into groups that only
contain contracts issued within one year.
17.3.2
The contractual service margin or loss component for groups of
insurance contracts without direct participation features
When it is impracticable for an entity to apply the retrospective approach at initial
recognition to determine the contractual service margin or the loss component of the
liability for remaining coverage, an entity is permitted to determine these at transition
date using a modified approach to determine the components of the liability for
remaining coverage. [IFRS 17.C11].
The modified retrospective approach allows considerable judgement as it permits an
entity to go back as far as it is able in order to determine reliable accounting estimates
for the fulfilment cash flows. Inevitably, this will result in diversity of practice being
applied by first time adopters and some lack of comparability in the release of the
contractual margin in future periods between entities with longer-term contracts.
The process applied is as follows:
• The future cash flows at the date of initial recognition of a group of insurance
contracts should be estimated as the amount of the future cash flows at the
transition date (or earlier date, if the future cash flows at that earlier date can be
determined retrospectively), adjusted by the cash flows that are known to have
occurred between the date of initial recognition of a group of insurance contracts
and the transition date (or earlier date). The cash flows that are known to have
occurred include cash flows resulting from contracts that were derecognised
before the transition date. [IFRS 17.C12].
• The discount rates that applied at the date of initial recognition of a group of
insurance contracts (or subsequently) should be determined: [IFRS 17.C13]
• using an observable yield curve that, for at least three years immediately
before the transition date, approximates the yield curve estimated applying a
basis comparable with the general model to calculating discount rates (see 8.2
above), if such an observable yield curve exists; or
• if the observable yield curve described above does not exist, the discount
rates that applied at the date of initial recognition (or subsequently) should be
estimated by determining an average spread between an observable yield
curve and the yield curve estimated applying the general model, and applying
that spread to that observable yield curve. That spread should be an average
over at least three years immediately before the transition date.
• The risk adjustment for non-financial risk at the date of initial recognition of a
group of insurance contracts (or subsequently) should be determined by adjusting
the risk adjustment for non-financial risk at the transition date by the expected
release of risk before the transition date. The expected release of risk should be
determined by reference to the release of risk for similar insurance contracts that
the entity issues at the transition date. [IFRS 17.C14].
The estimate of future cash flows referred to above at the date of initial recognition
would include an estimate of acquisition cash flows.46
4604 Chapter 52
If applying the modified requirements above results in a contractual service margin at
initial recognition (i.e. there is a profit on initial recognition) then the entity should
determine the contractual service margin at transition date as follows: [IFRS 17.C15]
• use the modified discount rates calculated above to accrete interest on the
contractual serv
ice margin; and
• determine the amount of the contractual service margin recognised in profit or loss
because of the transfer of services before the transition date, by comparing the
remaining coverage units at that date with the coverage units provided under the
group of contracts before the transition date (see 8.7 above).
If applying the modified requirements above results in a loss component of that liability
for remaining coverage at the date of initial recognition, an entity should determine any
amounts allocated to that loss component before the transition date applying the
modified requirements above and using a systematic basis of allocation. [IFRS 17.C16].
The modified retrospective approach requires that reasonable and supportable
information exists for the cash flows prior to transition up until the date of initial
recognition (i.e. the date past which reasonable and supportable information is no longer
available). This means all of the cash flows within the boundary of the insurance
contract, as discussed at 8.2 above, including, for example, internally allocated directly
attributable insurance acquisition cash flows, claims handling costs, policy maintenance
and administration costs and an allocation of fixed and variable overheads.
The following example, based on Example 17 in the Illustrative Examples to IFRS 17,
shows the transition requirements for a group of insurance contracts without direct
participation features applying the modified retrospective approach. [IFRS 17.IE186-IE191].
Example 52.53: Measurement of groups of insurance contracts without direct
participation features applying the modified retrospective approach
An entity issues insurance contracts without direct participation features and aggregates those contracts into groups.
The entity estimates the fulfilment cash flows at the transition date applying the general model as the sum of:
• An estimate of the present value of future cash flows of €620 (including the effect of discounting of
€(150)); and
• A risk adjustment for non-financial risk of €100.
The entity concludes that it is impracticable to apply IFRS 17 retrospectively. As a result, the entity chooses to
apply the modified retrospective approach to measure the contractual service margin at the transition date. The
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 909