Sharif: The fundamental difference between IFRS 4 and IFRS 17 lies in the timing of profit recognition

Sami Sharif, Chief Executive Officer of Kuwait Insurance Company, Fellow of the Society of Actuaries, and Member of the American Academy of Actuaries, affirmed that the International Financial Reporting Standard IFRS 17, which has entered into application, has not changed the profitability level of insurance companies, but rather altered the timing and mechanism of profit recognition, thereby enhancing transparency and comparability among companies worldwide.

Sharif explained that the fundamental question addressed by both IFRS 4 and IFRS 17 is: “When should an insurance company recognize profit?” He noted that under IFRS 4, companies enjoyed considerable flexibility in calculating profits, often allowing them to recognize a large portion of expected profits immediately upon issuing an insurance policy, despite their ongoing obligation to provide coverage for several months or even years.

He added that IFRS 17 is based on a different philosophy, adhering to the principle that profit should only be recognized when it is actually earned through the provision of insurance services. He likened this to a contractor who does not record profits from a bridge construction project upon signing the contract, but rather recognizes them progressively as portions of the project are completed—a concept now applied accounting-wise to insurance companies.

He pointed out that the impact of this change is more pronounced in life insurance, as its policies may span decades, whereas the impact is less significant in general insurance, where policies typically last for one year, although it remains noticeable due to the new measurement rules established by IFRS 17.

Sharif noted that the new standard did not merely change the timing of profit recognition, but also introduced new concepts, including the calculation of a risk margin, more accurate measurement of liabilities, and changes in the treatment of certain costs, making financial statements more transparent and comparable.

He clarified that among the key advantages of IFRS 17 are the harmonization of accounting rules among insurance companies, facilitating the comparison of results, reflecting the financial position more accurately, linking profits to the actual services provided, and increasing transparency and confidence in financial reports.

Conversely, IFRS 4 is simpler and easier to apply, less costly, more flexible, and easier for non-experts to understand. However, this flexibility meant that two similar companies could report different results due to differences in accounting policies.

Sharif concluded by emphasizing that IFRS 17 was not introduced to make insurance companies more or less profitable, but to make the measurement and disclosure of profits more consistent and transparent. He explained that the fundamental difference between the two standards lies in the questions they ask: IFRS 4 asked, “How much do we expect to earn?” while IFRS 17 asks, “How much have we actually earned to date through the provision of insurance services?”