The Hong Kong Institute of Certified Public Accountants (HKICPA) has approved HKFRS 17: Insurance Contracts, the equivalent of IFRS 17 issued by the International Accounting Standards Board (IASB). Like IFRS 17, HKFRS 17 will come into force on January 1, 2021.
There have been worries about the effective date because Hong Kong is also in the process of imposing new capital requirements and lacks specialist resources. Other jurisdictions (read: Singapore) may also decide on a later effective date, which could give them a competitive edge.
“HKFRS 17 ensures that Hong Kong’s insurance industry remains at the forefront of global accounting best practices and that Hong Kong maintains its position as a world’s leading financial center,” said Christina Ng, Director, Standard Setting, at HKICPA, Hong Kong’s standard-setter and statutory licensing body of CPAs.
“More importantly, HKFRS 17 better reflects the insurers’ liabilities and financial wellness by using more up-to-date market inputs and comparable data. This is important for investors assessing the long term continuity of the company, hence offering better protection to investors and enhancing market efficiency.”
Liabilities and revenue recognition
Insurance, in particular life insurance, is based on long term assessments and estimations. By updating insurance liabilities with current value market inputs, HKFRS 17 aims to help policy holders and investors assess whether insurance companies have sufficient reserves to make payouts and cope with various economic risks over the long term.
Currently an insurer’s liabilities may be measured using historical market data. Investors who want to understand the long term risk profile of these companies need to request management's alternative performance measures, and these measures may vary by company.
HKFRS 17 also requires insurance companies to recognize revenue when the insurance services are actually provided. In the current practice, premiums are recognized as revenues when they are received, even though these premiums represent services that will be provided over the course of time in the future.
As well, the new standard is designed to add more clarity to how much of the insurer’s profit comes from insurance activities and how much from asset management activities. This applies to insurance companies that offer insurance and asset management products, or a combination of both in one issuance.
The distinction is meant to help investors better compare the financial results and sustainability of an insurer and its peers, be it another insurer or a pure asset manager. This is important for a long term investor in assessing the full picture of a company's operations and sustainability in the long run.
CFOs and their finance teams have three years to implement the new standard. “That may seem a long way off, but the timescale will be a challenge for many,” warns Big Four accounting KPMG, referring to IFRS 17 and, by extension, to HKFRS 17, which is a word-for-word adoption of IFRS 17. “A coordinated response will be essential. Finance, Actuarial and IT functions will need to work closely together like never before.”
The HKICPA says it is aware of concerns about “whether Hong Kong insurance companies have sufficient time to implement HKFRS 17 because of the concurrent development of new regulatory capital requirements in Hong Kong and a lack of specialist resources across Asia.”
It promises to establish an implementation support group for Hong Kong stakeholders, enhance training and support, work closely with the Insurance Authority and the Hong Kong Federation of Insurers, and closely monitor and report on global developments.