FSS Permits Conditional Application of New Accounting Standards for Insurance Companies Retroactively

The Financial Supervisory Service (FSS) has responded to the complex issue surrounding the accounting treatment of Contractual Service Margins (CSM), which is considered a future revenue indicator under the new insurance accounting standard, IFRS 17. Given the initial apprehensions about potential earnings inflation among some insurance companies planning to conduct “retroactive application” of the standard, the FSS has taken a proactive stance to prevent any undue overstatement of profits.

The FSS organized an “IFRS 17 Guideline Accounting Treatment Seminar” at its headquarters in Yeouido on July 27. The seminar aimed to consolidate the insurance industry’s differing viewpoints and opposition regarding the accounting treatment methods for CSM, following the release of the CSM guideline for accounting assumptions last month. Notable attendees included CEOs of the top 10 major life and non-life insurance companies, the Chairman of the Life and Non-life Insurance Association, and representatives from four accounting firms’ audit departments.

In its response, the FSS categorized the accounting changes resulting from the application of the accounting assumption guidelines as “changes in accounting estimates.” While forward application is the guiding principle, the FSS allowed for the possibility of companies and auditors retroactively restating financial statements if it is deemed more appropriate for expressing the economic substance.

In such cases, the FSS stipulated that the revised financial statements should be categorized and disclosed under insurance liabilities (BEL, RA, CSM), equity items, and current period profits to ensure comparability and fairness when compared to companies applying the forward method.

Moreover, to prevent any undue CSM increase resulting from retroactive application, the FSS imposed limitations on retroactive adjustments related to other accounting policies and fair value for insurance liabilities, which were firmly established as of Jan. 1 of the preceding year, the designated IFRS 17 transition date. To reinforce transparency, the FSS revealed its plans to enhance disclosure requirements or take other measures for insurance companies undertaking retroactive restatements until the conclusion of this year’s year-end closing.

However, the FSS clarified that any intentional manipulation of financial statements in connection with retroactive restatements will not be subject to these measures. An FSS official said, “The IFRS 17 accounting assumption guidelines are slated for phased implementation, commencing from the financial closing in June. Furthermore, additional guidelines will be distributed as needed through meetings and analytical assessments with accounting firms in the future.”