Lifecos face 'really epic' accounting change - here's why it matters - BNN Bloomberg

Effective Jan. 1, 2023, Sun Life Financial Inc., Manulife Financial Corp., and Great-West Lifeco Inc. will be subject to a new International Financial Reporting Standard for insurance contract accounting .

Below, BNN Bloomberg breaks down the basics of IFRS 17 for insurance contracts and why it matters to the average Canadian investor.While the pandemic raised global mortality risk and hit the big lifecos’ bottom lines, IFRS 17 has been discussed by stakeholders and the International Accounting Standards Board since 2017.

With the new standard, analysts will be able to hone in on lifeco earnings that will now distinguish income from insurance and investment-related sources, thus providing additional insights into the fundamentals of the business. “It's very different if it's life insurance, because now suddenly you've got a policy that you may actually be paying over 20, or 30, or 40 years. You're building up some value in that life insurance policy,” said Mezon-Hutter. “In today's world, [the premium] would be revenue. Whereas in tomorrow's world, only the part associated with the insurance coverage is revenue and the rest is a deposit.

Since revenue is going to be recognized over a greater period of time under IFRS 17, there is potential for companies to overstate revenue. Companies may get what’s called a “qualified opinion” – an audit opinion that suggests the company’s financials are not fairly represented in a specific area. D’Souza noted that dividends will likely be affected more by overall market conditions rather than an accounting change. While dividends are expected to grow in line with earnings, he said a fund that owns broad-based equities tied to the S&P/TSX Composite Index would have exposure to the big lifecos, and therefore IFRS 17.

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