IFRS 17: how to overcome cash flow matching challenges

IFRS 17 is expected to overhaul the insurance industry when it finally launches on 1 January 2023, after almost a decade in the making. 

Designed to improve transparency and comparability across the sector, the new standard presents firms with fresh accounting challenges. 

The UK government has warned that ‘IFRS 17 will involve considerable actuarial input’. This is because IFRS 17 requires cash flow matching to be done in granular detail. 

There has been a strong temptation here for firms to take a “to do later” approach but, with the implementation date looming, many are looking to change their operating models sooner rather than later.   

Failing to correctly match IFRS 17 cash flow will lead to incorrect reporting outputs. This in turn will lead to financial performance being misrepresented. 

As errors accumulate over time, it will eventually hit firms’ bottom lines and compromise their integrity; after all, IFRS 17 calculations feed directly into financial statements used by stakeholders to assess performance. 

To help firms adapt to the new standard, we’ve outlined the main challenges firms face around IFRS 17 cashflow matching – and how best to overcome them. 

What is cash flow matching? 

Cash flow matching is the comparison between expected cash flows (taken from actuarial models) and accounting actuals (taken from the general ledger and policy admin systems).  

Challenge #1: it is hard to do accurately 

Within the scope of IFRS 17, datasets will reach the hundreds of millions – all of them need to be compared. Datasets from different periods will also have to be compared to ensure consistent reporting.  

Given the level of detail required, cash flow matching is difficult to do accurately and will take up a considerable chunk of employees’ time.  

But firms can overcome this challenge by implementing an automated software solution. It has the ability to process large amounts of data at higher speeds, which reduces both errors and the amount of time spent on reconciliations. 

Challenge #2: no ‘one-size-fits-all’ approach 

Each individual insurer will need a unique approach to IFRS 17 because every firm has different products and uses different systems. And each insurer’s actuarial, general ledger and policy admin datasets will include several formats with varying degrees of detail. 

To generate IFRS 17 data, firms will need to map – and distinguish between – actuarial and accounting products and IFRS 17 portfolios, as well as actuarial variables, accounting accounts and IFRS 17 cash flows. 

Accounting data will likely need additional allocations or calculations. Applying and maintaining tailored mappings and calculations will only add to the challenge. 

An automated software solution specifically tailored to operational requirements will enable firms to carry out the mapping, allocation, calculation and reconciliation of data between core systems with ease. The AutoRek platform has the capacity to support all data types and perform the data aggregation required for cash flow matching. 

Manual processes remain the biggest challenge 

Handling large volumes of data to meet the above criteria will be near impossible for organisations still reliant on a DIY reconciliation systems. 

And it will only get harder as time progresses because calculations must be performed within each account period. The most effective IFRS 17 processes will utilise software solutions to be automated, scalable and repeatable.  

Learn more about cash flow matching by reading our free, comprehensive whitepaper. Download it here

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