IFRS 17 "Insurance contracts" came into force for annual reporting periods beginning on January 1, 2023, and it completely replaced IFRS 4. The goal of the new Standard is to establish a consistent accounting model for insurance contracts. In IFRS 17, the definition of an insurance contract is specified, and it is important to note that the rules from this standard apply to all contracts that correspond to that definition, and not exclusively to contracts from the insurance sector. Entities that offer, for example, extended guarantees, credit guarantees, guarantees for pension obligations, etc., should, therefore, thoroughly study the terms of such engagements - even when these engagements are not legally in the form of insurance contracts - because IFRS 17 may apply precisely to such contracts.

Significance of the scope of IFRS 17 for non-insurance entities

The definition of an insurance contract in IFRS 17 and its scope have not changed significantly compared to what is stated in IFRS 4, which is why entities whose activities do not include insurance services may assume that they are not affected by this Standard. Namely, according to IFRS 4 entities that issue insurance contracts could process them in accounting according to previously adopted local accounting standards. In practice, this means that many different approaches were used, which made it difficult to compare financial statements among similar entities.

IFRS 17 tries to solve the problem of difficult comparison of financial statements and related financial indicators by requiring that all insurance contracts be treated in a consistent manner. This specifically means that entities are required to use the selected prescribed measurement model for their insurance liabilities, using updated information for risks and liabilities. There are still differences in the methods that can be applied, such as determining discount rates or risk adjustment, but these innovations introduce significant improvements in accounting practice.

When entities other than insurers conclude that they have issued contracts that fall within the scope of IFRS 17, it is important that they consider the adequacy of their information systems, relevant processes, human resources and governance to meet the complex recognition and measurement procedures and presentation and disclosure requirements that are defined by the Standard.

When does a contract meet the definition of IFRS 17?

IFRS 17 defines insurance contracts in a similar way to IFRS 4: a contract under which one party (the issuer) accepts a significant insurance risk from another party (the policyholder) by agreeing to indemnify the policyholder in the event of a certain uncertain future event (the insured event) adversely affects the insured.

The definition consists of several key features:

• insurance risk transfer, which is defined as "risk, other than financial risk, transferred from the contract holder to the issuer"
• the transferred insurance risk must also be significant
• compensation for damage under the contract is linked to the occurrence of the insured event
• the policyholder must already be exposed to the insurance risk, whereby the insured event has a negative effect on the customer if it occurs.

Financial guarantee contract or insurance contract?

A financial guarantee agreement is defined by IFRS 9 as an agreement under which the issuer must make agreed payments to compensate for a loss incurred because the original obligor did not make a payment in accordance with the agreed terms, original or amended. This rather condensed definition of a financial guarantee only applies if the guarantee relates to a debt instrument. Therefore, it does not cover product guarantees, performance guarantees and non-specific "letters of intent" that parent entities sometimes issue to their subsidiaries.

A valid contract for the provision of services with a fixed fee

Some contracts fit the definition of an insurance contract, but their primary purpose is simply to provide services for a fixed fee. Such contracts are covered by IFRS 17, but the entity issuing such contracts can choose to apply IFRS 15 only if all the following conditions are met:

• the entity does not take into account the risk assessment associated with a particular customer when determining the price of the contract with that customer,
• the contract stipulates that the compensation provided to the customer is in the form of providing a service, and not in the form of a cash payment to the customer,
• the insurance risk transferred by the contract primarily stems from the use of services by the customer and not from uncertainty regarding the cost of those services.

Entities that are not insurers and that did not apply insurance accounting in the past are not necessarily exempt from applying insurance accounting in the future. The novelties introduced by IFRS 17, such as the removal of the separation feature of IFRS 4 and the set stricter measurement requirements, can have a significant impact on the accounting management of contracts that, according to the definition in IFRS 17, are considered insurance contracts. Due to the complexity and time-consuming nature of applying IFRS 17, entities other than insurers must pay particular attention to this Standard to determine whether it is applicable or not.

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