Challenges in accounting for insurance contracts under IFRS 17 and determination of taxable income

By Maxwell Ngorima

Zimbabwe’s insurance sector continues to experience significant changes in financial reporting due to the adoption of advanced International Financial Reporting Standard (IFRS) based accounting frameworks, particularly the transition from legacy IAS 17 / IFRS 4 models to IFRS 17 – Insurance Contracts.

 

While these standards improve transparency and comparability, they create considerable divergence from Zimbabwe’s tax legislation, most notably the 8th Schedule of the Income Tax Act [Chapter 23:06], which prescribes a specialised regime for insurers.

This article highlights the key areas of misalignment and the implications for short term and long term insurers as they prepare financial statements and compute taxable income.

Basis of Taxation vs IFRS Accounting

Accounting Treatment (IAS 17 / IFRS 17)

Insurance accounting under IAS/IFRS follows an accrual based, service delivery model, where:

• Revenue is recognised as insurance services are provided.
• Claims liabilities, unearned premium reserves and other obligations are actuarially derived.
• Under IFRS 17, revenue and liabilities rely heavily on actuarial calculations and concepts such as fulfilment cash flows and the Contractual Service Margin (CSM).

Tax Treatment Under the 8th Schedule.

• Short term insurersare taxed strictly on a cash basis: premiums and reinsurance commissions are taxable when received; claims are deductible when incurred.
• Life insurerscompute taxable income using actuarial liabilities prescribed in legislation, not IFRS measurement bases.

Implication

The fundamental mismatch in revenue recognition timing requires insurers to produce two sets of numbers—IFRS accounts and statutory tax numbers—often resulting in significant reconciliation adjustments.

 

Treatment of Technical Reserves

Under IFRS, insurers recognise a wide range of technical reserves, including:

• Unearned premium reserves
• Incurred but not reported (IBNR) claims.
• Future claims handling costs
• Actuarial risk adjustments

However, the 8th Schedule disallows most technical reserves, allowing only unexpired risk reserves as deductions.

Implication

Annual tax computations require reversing most IFRS recognised reserves, leading to:

• Higher volatility in taxable income
• Increased administrative effort.
• Greater risk of ZIMRA queries due to large add backs.

Reinsurance Timing Differences

Accounting (IFRS)

Reinsurance assets and liabilities are recognised on an accrual and matching basis, consistent with underlying insurance exposures.

Tax (8th Schedule)

• Reinsurance premiums: deductible only when actually paid.
• Reinsurance commissions: taxable when received

Implication

Timing gaps arise, particularly where reinsurance settlements are delayed or structured across multiple periods.

 

Increasing Reliance on Actuarial Valuation Under IFRS 17

IFRS 17 introduces:

• Insurance services revenue
• Reinsurance services revenue
• Fulfilment cash flows
• Contractual Service Margin (CSM)

These figures are actuarially derived and differ materially from the statutory tax formula.

Implication

ZIMRA may scrutinise these balances due to limited transparency, increasing:

• The burden of supporting actuarial assumptions.
• The likelihood of disputes where IFRS values diverge from legislated formulas.

 

 Currency of Trade Requirements

Zimbabwe tax rules require taxes to be paid in the currency of trade, proportionate to foreign currency vs local currency income earned, received, or accrued.

Implication

Where IFRS accounting shows foreign currency accruals but cash flows are in local currency (or vice versa), insurers may face:

• Exchange gain \ driven distortions in tax liability
• Mismatches between actual cash flow and tax payment obligations
• Higher foreign currency tax exposure unrelated to cash received.

 

Impact of IFRS 17 Transition

While IAS 17 is historically relevant, IFRS 17 transition amplifies the misalignment, including:

• Increased complexity of actuarial driven insurance liabilities
• Risk of double taxationdue to retrospective adjustments (e.g., profit previously taxed under IFRS 4 may be deferred under IFRS 17 and taxed again via CSM treatment).

Implication

Insurers may now require three reporting layers:

. IFRS 17 financial statements

. IPEC statutory returns

. 8th Schedule tax computations

 

 AMENDMENT  of Section 15(2) pp

  The Finance Act No. 7 of 2025 introduced section 15(2)pp of the Income Tax Act which seeks to allow any amount paid by way of intermediated money transfer tax [IMMT].

It would appear that short term insurance companies whose deductions are allowable in terms of Para 5(d)  of the 8^th Schedule might not benefit from this deduction as  this paragraph has not been amended to allow the deduction of IMMT as provided for in terms of Section 15(2) pp of the Income Tax Act.

 

What Insurers Should Do

It is recommended that insurers:

• Establish robust reconciliation frameworksbetween IFRS and tax numbers.
• Ensure actuarial and finance teams collaborate early when IFRS 17 models change.
• Maintain documentation supporting reserve movements and actuarial assumptions.
• Periodically review tax implications of currency of trade requirements.
• Engage proactively with ZIMRA where new IFRS treatments create uncertainty.
• Lobby for paragraph 5(d) of the Income Tax Act to be amended so that it allows for the deduction of IMMT with effect from 1 January 2026.

 

How BDO Can Assist

Our insurance tax specialists can support your organisation with:

• IFRS to tax reconciliation tools
• Tailored training on IFRS 17 implications
• Tax health checks focusing on insurance specific risks.
• Assistance in preparing or reviewing 8th Schedule computations.
• Advisory on foreign currency taxation exposures

 

The divergence between IFRS insurance accounting and the Zimbabwean tax framework, particularly the 8th Schedule, creates significant compliance challenges. With IFRS 17 now in effect, insurers face heightened complexity and should adopt proactive measures to manage tax risk, ensure accurate reporting, and maintain regulatory compliance.

BDO Zimbabwe stands ready to help your organisation navigate this evolving landscape.

 

DISCLAIMER

The views and opinions expressed in this article are those of the author, Maxwell Ngorima, and do not necessarily reflect the official policy or position of the BDO Zimbabwe. This article is intended for informational purposes only and should not be construed as legal, tax, or financial advice. Readers are encouraged to consult with qualified professionals for advice specific to their individual circumstances.

 

Maxwell Ngorima is a tax partner at BDO Zimbabwe chartered accountants. He can be contacted on 263772247643