IRDAI defers the effective date | KPMG | IN

IRDAI defers the effective date for implementation of Ind AS in the insurance sector to 1 April 2020

IRDAI defers the effective date

The Insurance Regulatory Development Authority of India (IRDAI) through its order dated 17 November 2015 stated that the insurance sector in India would converge with International Financial Reporting Standards (IFRS) after the issuance of the revised standard on insurance contracts by the International Accounting Standards Board (IASB).

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Background

The Insurance Regulatory Development Authority of India (IRDAI) through its order dated 17 November 2015 stated that the insurance sector in India would converge with International Financial Reporting Standards (IFRS) after the issuance of the revised standard on insurance contracts by the International Accounting Standards Board (IASB).

Subsequently, the Ministry of Corporate Affairs (MCA) on 30 March 2016 notified the road map for implementation of Ind AS for Scheduled Commercial Banks, insurance companies and Non-Banking Financial Companies (NBFCs) from 1 April 2018 onwards. 

The IRDAI also constituted an Implementation Group (IG) on 17 November 2015 to facilitate Ind AS convergence for the Indian insurance sector. On 29 December 2016, the IG submitted its report to the IRDAI, highlighting the potential Ind AS implementation issues for insurers in India along with its recommendations to ease out the implementation process. Additionally, the insurance companies were directed to submit proforma Ind AS financial statements from the quarter ended 31 December 2016 in the specified formats (IRDAI circular no. IRDA/F&A/CIR/ACTS/262/12/2016 dated 30 December 2016).

On 18 May 2017, the IASB issued the much awaited comprehensive international standard on insurance i.e. IFRS 17, Insurance Contracts. IFRS 17 replaces IFRS 4, Insurance Contracts1 which was in the nature of an interim standard pending the completion of the project on insurance
contracts by the IASB. 

The release of IFRS 17 standard led to IRDAI to review its position in the matter of implementation of Ind AS in the insurance sector.

(1IFRS 4 was meant to limit changes to existing insurance accounting practices. Hence, it gave companies dispensation to continue accounting for insurance contracts using national accounting standards which resulted in a multitude of different approaches. This made it difficult for stakeholders to compare and contrast the financial performance of otherwise similar companies. IFRS 17 is expected to resolve the comparison problems created by IFRS 4 by requiring all insurance contracts to be accounted for in a consistent manner, and is expected to benefit both investors and insurance companies.)

New development

The Board of IRDAI in its meeting dated 31 May 2017 noted the peculiarities of the insurance sector in India, specifically the fact that India does not have a standard equivalent to International Accounting Standard (IAS) 39, Financial Instrument: Recognition and Measurement. The IRDAI concluded that implementation of Ind AS in the present form is expected to lead to a position where assets would be valued on fair value/market value basis and liabilities would continue to be valued as per the existing formula based approach. This would lead to mismatch in the asset and liability valuation and would also cause volatility in the financial statements of the insurance companies. 

Additionally, IRDAI observed that the compliance costs would have to be incurred twice – once immediately on implementation of Ind AS and second when IFRS 17 would be implemented in India.

After considering the given facts, IRDAI through its circular no. IRDA/F&A/CIR/ACTS/146/ 06/2017 dated 28 June 2017 deferred the
implementation of Ind AS in the insurance sector in India for a period of two
years. Accordingly, Ind AS for Indian insurance companies would be applicable from 1 April 2020 (instead of 1 April 2018).

However, insurance companies would still be required to submit the proforma Ind AS financial statements to IRDAI on a quarterly basis effective from 31 December 2016.  Therefore, the requirement to submit proforma Ind AS financial statements on a quarterly basis has not been deferred.

Our comments

Deferment of insurance companies’ road map

Indian insurance companies were required to implement Ind AS 104, Insurance Contracts (converged with IFRS 4) from 1 April 2018. Since IFRS 4 has been replaced by IFRS 17, there was an urgent need to clarify which standard the insurance sector in India would need to apply while transitioning to Ind AS.

The IRDAI has, with the deferment of Ind AS road map for insurance companies, paid heed to the requests of a number of insurance companies and tried to avoid two major changes in accounting framework for the insurance sector.

Though the deferment of applicability of Ind AS is expected to provide some relief to the insurers in India, they should utilise this time to identity and address the key challenges involved in the implementation of Ind AS and IFRS 17.

Therefore, it would be advisable that the insurance companies continue with identification of the implementation issues on the necessary changes on account of transition to Ind AS, including IT system and legislative change requirements.

For insurance companies that are subsidiaries or associates of banking or other companies, the requirement to report on an Ind AS basis for consolidation purposes will continue despite the announcement by the IRDAI. Additionally, they are still required to submit proforma Ind AS financial statements to IRDAI.

Applicability of IFRS 17 internationally vs applicability date in India

Internationally, IFRS 17 is applicable from 1 January 2021. Earlier application is permitted only if a company also applies IFRS 9, Financial Instruments and IFRS 15, Revenue from Contracts with Customers

As a next step, in India, MCA would need to issue an IFRS 17 equivalent Ind AS standard.

Regarding the applicability date, it is important to note that as per the IRDAI, the application of Ind AS to insurance companies would be from 1 April 2020 with the transition date being 1 April 2019. Therefore, Indian insurance companies would be expected to apply Ind AS equivalent standard of IFRS 17 earlier than the international applicability date of 1 January 2021. 

Earlier application of the insurance standard would require application of Ind AS 109, Financial Instruments and Ind AS 115, Revenue from Contracts with Customers. Currently, Ind AS 109 is applicable in India but Ind AS 115 is not applicable to Indian companies that are following Ind AS transition road maps. 

Therefore, MCA would need to notify Ind AS 115 as well in order to apply Ind AS equivalent standard of IFRS 17 from 1 April 2020 (with the date of transition of 1 April 2019).

To access the text of the circular issued by IRDAI, please click here.

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