Public sector organisations are being advised to reassess their contracts to determine whether they fall within the scope of IFRS 17, the international accounting standard for insurance contracts, after recent clarifications by the Financial Reporting Advisory board (FRAB).
IFRS 17, which replaces the previous IFRS 4, aims to improve consistency and transparency in how insurance risk transfers are reported across all sectors. From the 2025–26 financial year, all UK public sector bodies preparing accounts under the government financial reporting manual (FReM) are required to comply with IFRS 17.
The Financial Reporting Advisory Board has clarified the application of IFRS 17 to government contracts, addressing uncertainty over arrangements where government departments issue indemnities or assurances to contractors managing project risks.
Specifically, the guidance notes that indemnities given to contractors to cover risks they face when delivering government contracts are generally not regarded as insurance risk and therefore fall outside IFRS 17’s scope.
However, contracts where one party accepts significant insurance risk from another, agreeing to compensate them for losses caused by uncertain future events, are within scope of IFRS 17. This definition covers a broad range of agreements, including verbal contracts, and does not require the involvement of an insurance company. The transfer of existing risks faced by third parties may also bring a contract within scope.
These clarifications recognise the complex nature of risk transfer in the public sector, where traditional insurance models may not always apply but significant financial risks still exist. As a result, public sector entities must carefully evaluate the substance of their arrangements to ensure appropriate accounting treatment.
The Government Actuary’s Department (GAD) has played a key role in developing supplementary application guidance for IFRS 17 within the government context. It is now working alongside accounting professionals to assist departments in modelling and quantifying disclosures required by the standard, to meet compliance deadlines.
Beyond the public sector, IFRS 17 represents a significant shift in insurance accounting worldwide, demanding greater transparency, consistency, and comparability. For entities with complex or non-traditional risk transfer agreements, such as captives or risk pools, the standard requires detailed analysis to determine contract classification and measurement.
For public sector organisations, the changes may affect reported liabilities and the timing of recognising risk exposures and related expenses. This can have broader implications for budgeting, financial planning, and performance assessment.
The updated guidance is part of ongoing efforts to harmonise public sector financial reporting with private sector standards, enhancing accountability and stakeholder confidence. As IFRS 17 adoption progresses globally, similar challenges in defining and accounting for insurance risk are emerging across industries and jurisdictions.
