Ten months into the IFRS 17 Insurance Contracts (IFRS 17) becoming effective, corporate tax experts active in the insurance industry have identified a number of challenges experienced during the implementation of the new standard.
Issued in May 2017 by the International Accounting Standards Board, IFRS 17 has been waiting in the wings for several years, with the standard becoming effective for annual reporting periods commencing on or after 1 January 2023.
Developed for the insurance industry, the standard was introduced to provide a more consistent and transparent way of accounting for insurance contracts.
IFRS 17 replaces the previous standard, IFRS 4, which was considered inadequate in terms of comparability and transparency. The new standard, however, has introduced significant changes to the accounting and financial reporting practices of insurance companies.
In KPMG’s South African Insurance Industry Survey 2023 released in September, Yacoob Jaffar, partner: corporate tax at KPMG, and Shaficque Narker, associate director: corporate tax at KPMG, unpacked some of their observations of the challenges encountered.
The duo says insurers have been working on determining the impact that the standard would have on taxable income and, ultimately, their tax liability for the 2023 and subsequent financial years. With the Taxation Laws Amendment Act of 2022 (TLAB) having been issued and signed by President Cyril Ramaphosa at the end of 2022, the TLAB was regarded as substantively enacted in December 2022.
They explain that, in the period leading up to the implementation of IFRS 17, various industry groups lobbied to provide commentary that could guide the legislators in their efforts to draw up relevant tax regulations.
“Despite best efforts to consider all eventualities and permutations (with specific reference to sections 28 and 29A of the Income Tax Act), as one would expect, certain nuances were only identified post-implementation date,” Jaffar says.
Life insurance
IFRS 17 impacts how policyholder assets and liabilities are recognised and measured. According to Jaffer and Narker, this creates nuances that require careful consideration when calculating current and deferred tax assets and liabilities.
They noted “value of liabilities” as a particular concern in the life insurance industry.
“Insurers are required to calculate a phasing-in amount for income tax purposes. This phasing-in amount is based on the difference between the ‘value of liabilities’ determined under the previously applied accounting standard IFRS 4 Insurance Contracts (IFRS 4) and the ‘value of liabilities’ determined under IFRS 17,” Narker says.
As explained in the survey, the TLAB specifies the formula and the periods that should be used to calculate the phasing-in amount for non-life (section 14(1)(3C)(e)) and life insurers (section 15(1)(d)(15)).
The difference between the “value of liabilities” under the two accounting standards results in either a surplus or deficit that the life insurer has to phase-in to its tax calculation over six years, resulting in current and deferred tax consequences.
Narker says the constituent components that need to be considered in determining the “value of liabilities” under IFRS 4 are different to those under IFRS 17.
“For example, premium debtors are not explicitly included in the ‘value of liabilities’ under IFRS 17. For life insurers applying the general measurement model (GMM), this is because all expected fulfilment cash flows relating to future coverage will be included in the liability for remaining coverage.
“Thus, the impact of these deductions when determining the ‘value of liabilities’ under IFRS 4 compared to ‘value of liabilities’ under IFRS 17 could result in a material surplus or deficit. This would then lead to a material impact on the phasing-in amount, and the consequent tax liability.”
He adds that in determining the phasing-in amount, it is important for life insurers carefully to consider that premium debtors have been appropriately allocated to insurance (or reinsurance) contract liabilities.
“It is important that the reasons for adjustments to ‘value of liabilities’ are understood and applied consistently by insurers,” Narker says.
Non-life insurance
Jaffar says common challenges that non-life insurers have experienced to date include the treatment of the liability for remaining coverage and deferred acquisition costs when determining the phasing-in amount for tax purposes.
“Again, the challenges stem from the difference in measurement between IFRS 4 and IFRS 17,” he says.
What is understood as “unearned premium provision” and “premium debtors” are problematic in the non-life insurance arena.
In the survey, the two corporate tax experts set out that under IFRS 17, liability for remaining coverage may be largely equivalent to the unearned premium provision previously held under IFRS 4, less insurance and reinsurance receivables (including premium debtors) and payables.
Section 28(3)(a) of the Income Tax Act previously provided for the deduction of the unearned premium provision in determining the taxable income of a non-life insurer.
The amendments to section 28(3)(a) of the Income Tax Act require careful consideration by insurers as the amended section now merely refers to a deduction “… equal to the sum of liabilities for incurred claims relating to short-term insurance business in respect of the policies of the insurer, net of amounts recognised in respect of reinsurance contracts for liabilities for incurred claims, which are determined in accordance with IFRS as reported by the insurer to shareholders in the audited annual financial statements …”.
They say the challenge arises due to the differences in recognition requirements between the two accounting standards and the changes introduced in section 28 of the Income Tax Act (due to the implementation of IFRS 17).
“Under IFRS 4, the components that made up the value of liabilities were more easily identifiable on the face of the balance sheet. Under IFRS 17, insurers will need to be more careful to ensure that the various components of the liabilities to be included in taxable income are appropriately identified,” Jaffar says.
For non-life insurers applying the premium allocation approach (PAA), an asset for remaining coverage will exist where cash has not been received but insurance revenue has been recognised (effectively premium debtors under IFRS 4).
“In order for the correct adjustment or deduction to be taken into account when determining taxable income, the non-life insurer should be cognisant that an adjustment for insurance and reinsurance receivables and payables, including premium debtors, is required in terms of the amendments to section 28(3C)(c) of the Income Tax Act. The purpose of the amendment is to ensure that tax is being paid on premiums earned,” the survey reads.
Jaffar and Naker say that at this stage, it is not clear whether further amendments to sections 28 and 29A of the Income Tax Act would be required to deal with any unforeseen challenges that have been or are yet to be encountered.
“Given that various industry bodies have been rallying to drive collaboration with National Treasury, we anticipate further discussion and potential changes to remedy these uncertainties,” Naker says.
