Implications of IFRS 17 for Insurers and Banks in Tanzania

By Straton Makundi


Tanzania adopted International Financial Reporting Standards (IFRS) effective from July 2004. Commercial sector entities including insurance companies and banks have been applying IFRS in recognition, measurement, presentation and disclosure of their accounting transactions and balances. The International Accounting Standards Board (IASB) issued IFRS 17 Insurance Contracts which  is effective for annual reporting periods beginning on or after 1 January 2023. Earlier application was permitted provided   IFRS 9 Financial Instruments was also applied. IFRS 17 replaces IFRS 4 which was an interim insurance standard.

IFRS 17 Accounting Requirements

IFRS 17 considers insurance contracts as those contracts under which the entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. It also separates specified embedded derivatives, distinct investment components and distinct performance obligations from the insurance contracts. It divides the contracts into groups  recognized and measured at risk adjusted present value of future cash flows and at an amount representing the unearned profit in the group of contracts i.e. the contractual service margin (CSM).

Unlike under IFRS 4, where insurance revenue could be equal to the premium received in the period, IFRS 17 recognises revenue from a group of insurance contracts over the period an entity provides insurance contract services and is released from risk. IFRS 17 also requires recognition of losses immediately when a group of contracts becomes onerous (loss making). The gains from the contract are booked in the statement of financial position (SFP) while the outstanding amount owed to the policy holder over the life of the contract are recognized as a liability in the SFP.

The standard identifies three measurement models for the accounting of insurance contracts i.e General Measurement Model (GMM) i.e Building Block Approach (BBA), the Variable Fee Approach (VFA) and an optional simplified approach i.e the Premium Allocation Approach (PAA) for simple insurance contracts.

The impact of IFRS 17

Initial implementation of IFRS 17 will require insurance entities to make estimates for previous accounting periods as well as the current period as IFRS 17 is applied on a retrospective basis, unless impracticable, in which case a modified retrospective or fair value approach may be utilized.

  • Under all approaches, items in the opening balance sheet and comparative information will need to be restated, which for a 31 December year-end would be 1 January 2022 for an entity that does not early adopt IFRS 17.

IFRS 17 will significantly change the financial reporting framework for most insurers and the nature of many accounting estimates and the related presentation and disclosures will largely change, including, but not limited to, the following:

     i) Future Cash Flows:

IFRS 17 provides principles-based requirements to measure insurance contracts using current estimates of the expected value of cash flows.  These requirements may differ from existing IFRS accounting in many areas relating to cash flows including contract boundaries, the granularity of information, the balance of prudence (in certain current IFRS regimes) and neutrality in IFRS 17 applied in making estimates, and the frequency with which assumptions must be updated.

Time value of money and financial risk

IFRS 17 introduces requirements for calculating the impacts of changes relating to the time value of money and financial risk. There is a significant number of judgements and assumptions to be made in estimating and applying a rate to allow for this.

     ii) The Discount Rate

IFRS 17 provides two types of approaches for the estimation of discount rates

Bottom-up approach

  • This is for cash flows which do not vary on the basis of the returns on underlying items.
  • The insurer may determine discount rates by adjusting a liquid risk-free yield curve to reflect the differences between the liquidity characteristics of the financial instruments that underlie the rates observed in the market and the liquidity characteristics of the insurance contracts.
  • Judgement is required both in the construction of the risk-free yield curve and in the assessment of the degree of illiquidity inherent in the insurance contracts.

Top-down approach

  • This is determination of the appropriate discount rates for insurance contracts based on a yield curve that reflects the current market rates of return implicit in a fair value measurement of a reference portfolio of assets (a top-down approach).

iii) The Risk Adjustment

IFRS 17 does not prescribe a method to calculate the risk adjustment although it does note that the principle of the adjustment is to reflect the compensation an entity requires for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk as the entity fulfils insurance contracts. However, it requires an explicit calculation and disclosure of the amount and method used to determine the risk adjustment.

A risk adjustment is required for both insurance contracts issued, and reinsurance contracts held. IFRS 17 also requires disclosure of the equivalent confidence level irrespective of the method used to determine the risk adjustment. These requirements introduce significant subjectivity.

     iv) The Contractual Service Margin

Contractual Service Margin (CSM) – IFRS 17’s introduction of an explicit CSM, representing the expected profit from a group of contracts that will be recognized over the coverage period, is a key element of the accounting model and is new compared to most existing financial reporting models applied by insurers.

Other challenges during implementation of IFRS 17 include:

  • Revenue recognition e.g. aggregation, CSM, Model e.g PAA eligibility assessment, insurance revenue.
  • Reinsurance contracts assets accounting
  • Recognition of onerous losses and insurance expenses
  • Actuarial Assumptions, the use of IT, models, data, valuations, impairments
  • Income taxes-current and differed tax provisions etc.

IFRS Application to Banks and Investment Companies

IFRS 17 is applicable to Tanzanian banks and investment companies with significant insurance operations. Also some banks issue contracts (financial guarantee contracts) compelling them to compensate the contract holders for losses incurred due to a debtor failing to make loan payments when due. These contracts meet the definition of an insurance contract if the insurance risk transferred is significant. For cases where these banks have concluded that they regard such contracts as insurance contracts and have used accounting that is applicable to insurance contracts, they may choose to apply the requirements either in IFRS 9 or IFRS 17 to such contracts. The banks may make that election on a contract-by-contract basis, but the election for each contract is irrevocable.


Mr. Makundi is a Partner with Auditax International