Tax impacts of insurance accounting changes

Tax impacts of insurance accounting changes

Peter Oliver explains the tax consequences of the upcoming new accounting standard for insurance contracts.

Partner, Tax

KPMG Australia

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Insurance accounting changes

After a number of years, consultation by the International Accounting Standards Board (IASB) on the forthcoming International Financial Reporting Standard (IFRS) for insurance contracts is now nearing completion. It is expected that the final standard should be issued by the end of 2016.

The new standard will replace IFRS 4 Insurance Contracts, with a mandatory effective date of 1 January 2020 or 2021 (with early adoption permitted). The impact of the accounting changes is significant and beyond the scope of this article, yet they give rise to a number of tax consequences that need to be considered.

Insurers will already be aware of the proposed changes to acquisition expenses, which will significantly impact long-duration (that is greater than one year) contracts, including many life insurance policies. Many acquisition costs will no longer be included in the policy liability calculation and will instead be immediately expensed for accounting purposes. No profit and loss (P&L) impact should arise on transition, as existing deferred acquisition costs will be removed from policy liability calculations and applied to reduce retained earnings.

However, the consequential increase in policy liabilities will bring forward the deduction for acquisition costs, which is likely to be substantial for many insurers. We are aware of the Australian Taxation Office's (ATO) interest in this consequence and it is possible that legislative amendments may be introduced to spread the timing of the deduction. Whether or not legislative changes occur, franking and cash tax (including pay as you go (PAYG) instalments) impacts will need to be considered.

Other tax impacts

The proposed standard may also give rise to other tax impacts, including:

  • a new basis for the measurement of policy liabilities and profit recognition, which could alter the timing of profit and assessable income/losses (this may impact the timing of cash tax payments without accounting to tax differences)
  • aggregation of policies for accounting purposes will require judgement on new principles and could result in more policies in loss recognition (where they cannot be aggregated). This could potentially increase timing differences for life insurance policies in loss recognition
  • whether restatement of retained earnings balances on transition could limit future dividend payments
  • changes to deferred tax balances that might have regulatory capital consequences.

Although there is a lengthy period until the new standard applies, insurers should plan for the tax consequences of changes by assessing the final standard when it is released later in 2016.

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