Here’s an overview of how revenue recognition works for insurance contracts under IFRS:
- Contractual Service Margin (CSM):
- One of the key concepts introduced by IFRS 17 is the Contractual Service Margin (CSM). The CSM represents the unearned profit on insurance contracts at the inception of the contract.
- Revenue is recognized over the coverage period as the insurer provides services to policyholders. The CSM is systematically released over time as the insurer fulfills its obligations under the insurance contracts.
- Coverage Period:
- Revenue is recognized over the period during which insurance coverage is provided to the policyholders.
- The revenue recognized in each reporting period reflects the services provided to date and the remaining obligations under the insurance contracts.
- Measurement of Revenue:
- Revenue from insurance contracts is measured based on the changes in the carrying amount of the insurance liabilities.
- Changes in estimates of future cash flows, discount rates, and risk adjustments impact the measurement of revenue over time.
- Risk Adjustment:
- The risk adjustment included in the measurement of insurance liabilities reflects the uncertainty and risk associated with fulfilling the insurance contracts.
- Any changes in the risk adjustment are reflected in the revenue recognized over the coverage period.