IFRS 7 Financial Instruments - Disclosures
Amendments to IFRS 4
The Board considered the best way to complete this project, in the context that significant work is still required on the Implementation Guidance to IFRS 4. The Board agreed to finalise IFRS 7 without amending the Implementation Guidance to IFRS 4. That is, the appropriate changes will be made to the text of the Standard, but not to its Implementation Guidance. This was agreed because the time taken to complete the Implementation Guidance would be significant and might seriously delay the issuance of IFRS 7, which did not seem appropriate since most insurance industry participants had indicated they do not intend to early adopt IFRS 7 (thus reducing the urgency for guidance in that industry).
The Board agreed to extend the option in paragraph 45 of IFRS 7 so that an issuer of insurance contracts may provide a sensitivity analysis based on value-based techniques (such as embedded value) if the entity's key management personnel use that technique to manage and evaluate is performance in accordance with a documented risk management or investment strategy, even where that technique does not play a part in determining the entity's profit or loss or equity. The Board agreed that this was consistent with IFRS 7 - the disclosures did not need to tie up to amounts recognised in the financial report. The Board unanimously agreed to require entities to provide sensitivity analyses covering the whole of their business, but permit entities to provide different types of sensitivity analysis for different classes of financial instruments.
The Board agreed that an entity that measures insurance liabilities using assumptions imposed by a regulator should comply with the requirement to provide a sensitivity analysis by disclosing how a reasonably possible change in the related risk variable would affect profit or loss or equity if such a change was applied to the regulator-set locked-in assumption. For example, where market rates of interest are 10% and the regulator forces the use of 3% and there is a reasonably possible change in market rates of interest to between 9 and 11%, that reasonably possible change would be applied in the context of the regulator set rate - that is the 9 - 11% would not be considered a reasonably possible change to the regulator-set assumptions but, for example, 2 to 4% might be.
The Board agreed that where a reasonably possible change in the risk variable would not trigger the liability adequacy test there may be no effect on profit or loss or equity and thus there may be no effect to disclose in the sensitivity analysis. If a reasonably possible change would trigger the liability adequacy test the entity would disclose the effect on profit or loss or equity from the resulting change in the measurement of the liability. The Board noted that in determining whether the liability adequacy test had been triggered a company might use similar methodology to that used for determining whether impairment testing requirements had been triggered.
The Board agreed that the sensitivity analysis permits, but does not require, entities to disclose the potential impact of future management actions that may offset the effect of changes in the risk variable under consideration. Such disclosure could be qualitative or quantitative, but would not exclude entities from the requirement to disclose the impact of the factor on sensitivity analysis without consideration of the effect of future management actions.
Certain industry representatives had suggested the liquidity risk disclosure of IFRS 7 could be improved. The Board agreed that while the disclosures might be able to be improved, the delay to the project was not justifiable.
The Board agreed that there was not a need to re-expose the amendments to IFRS 4 as a result of today's discussion.
Day 1 Profit Disclosures
At its February meeting the Board agreed disclosures in respect of Day 1 Profits. Staff noted that the proposed disclosures have been reproduced in the observer notes for this session which are available on the IASB website www.iasb.org. The Board agreed that these should be placed in a more prominent position on the website. Staff asked that any comments from the public be received by June 1st at the latest.
The Board discussed briefly the publication of near final drafts on its website. It was noted that in general the final pre-ballot draft was released on the website. The Board briefly debated whether, in the context of this, the 20 day notice period to National Standard Setters was really necessary. They agreed to debate this topic further in private session.
This summary is based on notes taken by observers at the meeting and should not be regarded as an official or final summary.
The IASB publishes summaries of the deliberations at Board meetings in its newsletter IASB Update. Past issues of IASB Update are available on IASB's Website. On Individual Project Pages on the IASB Website you will find links to observer notes and excerpts from IASB Update relating to that project.