SAP FPSL, the comprehensive solution for IFRS17 compliance

By Rubén Martín González

Currently, the insurance and reinsurance sector is faced with a situation where different accounting criteria are applied between different countries or jurisdictions. This lack of standardisation in accounting regulations makes it very difficult to compare companies, both in the same sector and at an international level.

The implementation of IFRS 17 aims to put an end to this problem by proposing a general framework to eliminate inconsistencies, harmonise accounting and facilitate the comparison of financial statements between insurance companies and companies in other sectors.
From January 1, 2023, IFRS 17 replaces IFRS 4, the provisional standard issued by the IASB in 2004. During 2022 the two standards will coexist in parallel to comply with the comparative period, until IFRS 17 is definitively and exclusively applied.

Companies subject to its implementation know the hard work they will have to do and the time this implementation may take in the areas of IT, actuarial, accounting and risk. Therefore, they should take advantage of the remaining time to start its implementation and avoid possible sanctions from the control entities.

The main challenge for the industry is that IFRS17 is not just another adjustment, it is a milestone. Among the most representative accounting changes are the reclassification of items on the balance sheet and the recalculation of revenue accounting for all contracts, both new and old, as well as changes to IT platforms and company strategy.

To achieve all this, SAP has created a complete solution, capable of integrating both actuarial and financial-accounting in a single tool.

SAP FPSL (Financial Products Subledger), in addition to being a channel for information flows, will be able to perform the necessary calculations (preparation of BECFs, cash flow discounting, calculation of CSMs, risk adjustment, etc.) to comply with IFRS17.


Baseline Delta Approach (BDA), an innovative Multi-GAAP approach

International companies usually have to do accounting based on local regulation and international standards such as IFRS or US GAAP.
In essence, BDA consists of dividing accounting entries into two components: a common component (Baseline) and the specific components of valuations (Delta accounting).
In this context, there are important issues to consider from a business perspective:

  • How to define the limits of the contracts, i.e. when are the amounts valid for each accounting rule?
  • Which amounts are relevant (in scope) for each rule?
  • How can I ensure that the amounts are provided with a level of granularity so that the different grouping criteria for the various accounting standards are met?

Solution Architecture

The following shows the tool's architecture and how it works:

  1. Local entities provide their contracts, coverage and transactions.
  2. Actuarial data (cash flow projections, patterns, amounts, yield curves) are imported into the system.
  3. ECP (Estimated Cash Flow Preparation) reads the information provided and calculates the BECFs, as well as the Exposure Period Split and amortization pattern of the CSM.
  4. The system with the information provided in the previous point, posts the Baseline (common component for all contracts).
  5. From the Baseline, the system determines which specific GAAP (IFRS 17, Solvency II, etc) needs to be calculated. The accounting entries of the determined GAAP are posted as deltas.
  6. Subledger postings will be available in HANA.
  7. SAP FPSL sends, in aggregate and through the ready-to-use interface, G/L documents to the General Ledger.

Accounting process

For the GM or BBA general valuation method, which will be applied to all contracts within scope, the CSM will represent the benefit that the entity will recognize in the future, and that the entity will release as it provides future services.

Initial valuation of CSM:

With the respective accounting in the system:

CSM in the subsequent valuation:
At this point, accounting entries will be made in the system, such as:

  • Accrual of interest
  • Changes in estimates
  • Depreciation (CSM, risk and acquisition cost adjustment)
  • Changes in the discount rate (OCI and P&L option)
  • Adjustments between actual and estimated flows

IFRS 17 is not only a financial, actuarial or risk project. It is the opportunity for insurers to transform their operations to the digital requirements of the modern era by integrating people, processes and technologies in order to streamline market dynamics, insurance assessment and industry comparability.

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