Effective from January 2027, how will IFRS18 impact insurers and how should you prepare?
The introduction of IFRS 18 Presentation and Disclosure in Financial Statements marks a significant shift in the financial reporting landscape. This new standard aims to improve transparency, comparability, and consistency in financial statements.
The key changes for insurance entities relate to:
- the structure of the profit or loss statement
- disclosures on management-defined performance measures
- aggregation and disaggregation
- presentation of foreign currency and derivatives transactions.
A newly structured income statement
One of the biggest changes under IFRS 18 is the introduction of a structured format for the statement of profit or loss. Items will be classified into one of five categories:
- Operating
- Investing
- Financing
- Income taxes
- Discontinued operations
Operating, investing and financing are the three most relevant categories for insurers. This structured approach aims to reduce diversity in financial reporting, making it easier for investors to understand and compare financial information from different entities.
There are specific adaptations to help insurers apply this new format, which we explain below. It’s also important to note that these categories may not fully correspond to those for cash flow statements.
Operating profit subtotal
IFRS 18 requires insurers to report a newly defined ‘operating profit or loss’ subtotal. This should provide a clearer picture of core business activities, separating them from the investing and financing categories.
Insurers’ main business activities often involve investing in assets. So this distinction as ‘operating’ for income and expenses associated with investing activities will present a more accurate financial performance.
Where insurers provide financing to customers, as well as the main activities of providing insurance products and investing in assets (such as bancassurers or issuing of mortgages), income and expenses that would otherwise be classified in financing are now included in the operating category.
IFRS 18 assumes that an entity issuing insurance contracts will do so as its main business activity. This means all IFRS 17 income and expense line items are classified in the operating category. The same applies to income and expenses arising from investment contracts with participating features recognised under IFRS 9.
What is a management-defined performance measures (MPM)?
Often insurers use several alternative performance measures (APMs) or non-GAAP measures to describe performance such as combined ratio, embedded value or value of new business. IFRS 18 brings in a new requirement to disclose management-defined performance measures (MPMs).
As distinct from an APM, an MPM is a subtotal of income and expenses that:
- an entity uses in public communications other than financial statements
- an entity uses to communicate (to users of financial statements) management’s view of an aspect of financial performance as a whole
- does not require application of an IFRS accounting standard or is explicitly excluded from the scope of IFRS 18.
Insurers must explain how the MPMs are calculated and why they provide useful information. MPMs should be disclosed in the financial statements in a single note, including a reconciliation between the MPM and the most similar specified subtotal in IFRS accounting standards.
It may be a judgement call as to which measures meet the definition of an MPM. This in turn may lead to additional metrics and further disclosures above those provided initially. The following are not considered to be MPMs:
- Regulatory ratios, such as solvency capital ratios, as these are based on regulatory measures rather than subtotals of income and expenses.
- Leverage or debt ratios, as these are based on balance sheet numbers rather than subtotals of income and expenses.
- Gross written premium or gross earned premium (for those insurers that still report these).
- New business metrics such as ‘new business CSMs’, as these are not subtotals of income and expenses.
MPM or not? How to work it out
The picture is even more complex when it comes to financial ratios such as combined ratios (CORs), return on equity or alternative EPS metrics – as the ratio itself is not an MPM.
But the numerator or denominator of a ratio could meet the definition. For example, for the calculation of CORs, if the insurer adjusts the insurance service expenses or insurance revenue numbers used to calculate the ratio, the numerator or denominator could become an MPM. In other words, if the insurer adjusts the insurance service expenses to include the reinsurance result so that it becomes a subtotal of income and expenses, it may apply.
Many insurers today report a non-GAAP ‘operating profit’ or similar APM to provide a consistent view of earnings. The calculation of this performance measure can differ a lot between insurers, But it usually involves adjusting the IFRS operating profit after tax.
In many cases, the measure will meet the definition of an MPM. Insurers who currently refer to the APM as ‘operating profit’ will need to rename it unless it represents the same operating profit as determined by IFRS 18.
The disclosures introduced by IFRS 18 are expected to improve the transparency of non-GAAP measures, giving stakeholders a clearer understanding of the company’s financial health and performance. This means several non-GAAP measures will be subject to audit testing as they are incorporated into the core financial statements.
Greater disaggregation of information
IFRS 18 provides clearer guidance on the principles of aggregation and disaggregation. It focuses on grouping items based on their shared characteristics. The new standard emphasises the need for greater disaggregation of information.
Where insurers include the line item ‘other operating expenses’, this may need to be disaggregated further. This could mean providing more detailed breakdowns of income and expenses in the notes to the financial statements, offering deeper insights for stakeholders.
Foreign exchange differences, derivatives, and designated hedging instruments
Under IFRS 18, foreign exchange differences must be classified in the same category as the income and expenses from the items that triggered these differences, unless doing so would involve undue cost or effort. So foreign exchange differences relating to insurance contract transactions are classified in the operating category.
For derivatives used to manage identified risks, including economic hedges, gains and losses are classified in the same category as the income and expenses affected by these risks. This also applies to non-derivatives designated as hedging instruments, per IFRS 9 or IAS 39.
Gains and losses on derivatives not used to manage identified risks are generally classified in the operating category. But beware: transactions related to raising finance may need some gains and losses to be classified in the financing category.
Does retrospective application apply?
IFRS 18 will be effective for annual reporting periods beginning on or after 1 January 2027, including for interim financial statements. Early application is allowed. The standard requires retrospective application, with the restatement of comparatives to ensure consistency and comparability.
What are the implementation challenges?
While IFRS 18 brings numerous benefits, it also poses significant hurdles. Insurers must adapt financial reporting systems and processes to comply. This transition will inevitably involve staff training and changes to systems and internal controls.
The adoption of IFRS 18 is a major milestone in the evolution of financial reporting for insurers. By enhancing transparency, comparability, and consistency, the new standard will provide stakeholders with a clearer and more accurate view of insurers’ financial performance.
But of course the transition will need careful planning and execution to overcome the associated challenges. Even more so for insurers who are only just recovering from having implemented IFRS 17.
The same rules apply for both public and private entities, including the identification and disclosure of MPMs. Entities should begin the process of identifying their MPMs now to prepare for any process or internal control changes that might be required.
As insurers get ready for this new era of financial reporting, it’s crucial to stay informed and proactive in implementing the necessary changes. Our Financial Accounting Advisory Services team is here to support you through this transition, ensuring a smooth and successful adoption of IFRS 18.
For more information, please contact Satya Beekarry or Michael Marslin.
