Ind AS 117, which came into effect on April 1, 2023, and was introduced in August 2022, represents a significant overhaul in the accounting treatment of insurance contracts in India. This new standard replaces Ind AS 104 and aligns with the global IFRS 17, introducing a more rigorous framework for the recognition, measurement, presentation, and disclosure of insurance contracts. Designed to enhance the consistency, clarity, and comparability of financial statements, Ind AS 117 aims to provide greater transparency and a more refined approach compared to its predecessor.
Cause of change from Ind AS 104:
Ind AS 117 was introduced to overcome the limitations of Ind AS 104, which, while providing a basic framework, lacked in-depth guidance on the measurement and presentation of insurance contracts. The new standard offers a more refined and globally aligned approach, bringing Indian insurance accounting practices in line with international standards.
Key Differences Between Ind AS 117 and Ind AS 104
- Measurement Models:
- Ind AS 117 introduces three models: the General Measurement Model (GMM), the Premium Allocation Approach (PAA), and the Variable Fee Approach (VFA). These models offer more precision and flexibility for different types of insurance contracts.
- Ind AS 104 used a simpler method with less detailed measurement guidance.
- Contractual Service Margin (CSM):
- Ind AS 117 includes the Contractual Service Margin, representing the unearned profit from insurance contracts, which is recognized over the contract’s coverage period.
- Ind AS 104 did not include a specific margin concept for unearned profits.
- Risk Adjustment:
- Ind AS 117 requires explicit measurement of risk adjustments for uncertainties in future cash flows.
- Ind AS 104 placed less emphasis on detailed risk adjustments.
- Enhanced Disclosures:
- Ind AS 117 mandates comprehensive disclosures regarding recognized amounts, associated risks, and management practices.
- Ind AS 104 had fewer disclosure requirements.
Notable Features:
- Three Measurement Models: Provides flexibility with GMM, PAA, and VFA, allowing insurers to select the most suitable model for their contracts.
- Contractual Service Margin (CSM): Represents the future profit from insurance contracts and is recognized over the coverage period.
- Risk Adjustment: Requires detailed measurement of compensation for bearing insurance risk, reflecting the uncertainty of future cash flows.
- Detailed Disclosures: Enhances transparency with extensive disclosures about financial performance, risk exposures, and management practices.
Relevance in today’s world:
Ind AS 117 holds significant relevance in the current financial landscape for several reasons:
- Global Alignment: By aligning with IFRS 17, Ind AS 117 ensures consistency with international practices, aiding global comparisons and attracting international investors.
- Increased Transparency: The standard’s detailed approach to measurement and disclosure enhances the clarity of financial statements, providing stakeholders with more accurate information.
- Improved Comparability: Its rigorous methodology supports better comparability across insurance companies and jurisdictions, which is essential in a globalized market.
Conclusion
Ind AS 117 signifies a major leap forward in insurance accounting by aligning Indian standards with global practices and enhancing the transparency and comparability of financial reporting. Replacing Ind AS 104 with a more comprehensive and detailed framework, Ind AS 117 improves the accuracy and uniformity of financial statements while boosting investor confidence and regulatory oversight. This shift represents a significant transformation in financial reporting for the insurance sector, leading to more informed decision-making and a better alignment with international financial standards. In today’s interconnected financial world, where clarity and consistency are essential, this evolution is particularly important for stakeholders globally.
