Dear Client,

Re: Is IFRS 17 mandatory for you?

Thank you for your message and query. Based on the facts provided by you, please see below the scope of services we are providing and also our full response in the form of an analysis of the IFRS requirements involved.

Our understanding of the query

You are a corporation operating in a non-insurance industry. You do not issue insurance contracts as such, however you sign contracts with customers which have features similar to insurance contracts, such as warranties and financial guarantees.

You are concerned with the complexity of the general approach model required by IFRS 17, and would like to know if the standard would apply only to insurance companies, or also to other entities.

Further, you would like to know if there are any scope exceptions from IFRS 17, which would apply to transactions

Scope of services

We analysed the information provided by you and the applicable requirements of IFRS 17 Insurance Contracts, in order to formulate our answer as presented below.

Kindly be aware that our answer is based on our best knowledge and interpretations of IFRS 17 and other standards currently available and based on information provided by you.

Should the information provided by you, or currently available interpretations of IFRS 17 change, the conclusions of our analysis could be different. Any conclusions presented in this document refer only to the situation presented by you in the query. We did not review or analyse any internal documentation prepared by your firm.

Our response to your enquiry

Scope of IFRS 17

IFRS 17 is the new standard dealing with recognition, measurement and revenue recognition on insurance contracts. Naturally IFRS 17 will have the most significant impact on insurance companies, however it is essential to note that the application of the standard is not limited to insurers.

In accordance with IFRS 17.3, the standard will apply to all entities, as long as they issue contracts meeting the definition of an insurance contract. More specifically, IFRS 17 will have to be applied to:

• insurance contracts, including reinsurance contracts, an entity issues,
• reinsurance contracts an entity holds,
• investment contracts with discretionary participation features it issues, provided the entity also issues insurance contracts.

It means that any entity, even if it is not an insurance or reinsurance company, may potentially be obliged to implement requirements of IFRS 17, as long as it issues contracts to its clients, which meet the definition of an insurance contract.

Definition of insurance contracts

IFRS 17 defines an insurance contract as “a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder”.

As can be seen, the factor that distinguishes an insurance contract from other contracts is existence of significant insurance risk, to which the contract exposes its issuer.

Insurance risk is considered significant if the contract may lead to the issuer of the contract having to pay significant additional amounts in any scenario, excluding scenarios that lack commercial substance.

IFRS 17 defines insurance risk as risk, other than financial risk, transferred from the holder of a contract to the issuer. That definition implies that insurance risk is a risk that is specific only to the party of the contract, which makes such risk different from financial risks, such as price, interest rate or currency risks.

Transactions out of scope of IFRS 17

Although the definition of an insurance contract is generally broad and could apply to a wide range of contracts, such as production warranties, IFRS 17 contains a number of list of types of transactions, for which IFRS 17 will not be applied. In particular:

• warranties provided by a manufacturer, dealer or retailer in connection with the sale of its goods or services to a customer,
• contractual rights or contractual obligations contingent on the future use of, or right to use, a non-financial item (for example, license fees, royalties, variable and other contingent lease payments and similar items),
• residual value guarantees provided by a manufacturer, dealer or retailer and a lessee’s residual value guarantees when they are embedded in a lease,
• employers’ assets and liabilities from employee benefit plans and retirement benefit
• obligations reported by defined benefit retirement plans, contingent consideration payable or receivable in a business combination.

So, if you identify any of the above transactions, they will be exempted from IFRS 17.

Please note that for financial guarantees issued, that is contracts in which an entity will be obliged to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a given debt instrument, an entity will have an accounting policy choice option either to account for them in accordance with IFRS 17 or in accordance with IFRS 9.

Finally, it should be noted that insurance contracts in which the entity is the policyholder, are also exempted from application of IFRS 17, unless those contracts are reinsurance contracts held by the entity.

To sum up, application of IFRS 17 is not limited to insurance companies only and no entities are automatically excluded from its application.

We encourage you to review agreements of all contracts, which may potentially meet the definition of an insurance contract and consider them in the light of the list of scope exemptions presented above. Please do not hesitate to contact us in case of any doubts, we will be happy to assist you with this exercise.

We hope that the above will be useful to you. Please let us know in case you have any additional questions or need any clarifications!

Best regards,

Your IFRS Helpline Team