Discussion on whether to abandon the risk adjustment (agenda paper 14C)
The IASB staff introduced the subject providing an overview of the April 2012 meeting where the FASB staff provided the IASB with a detailed description of the “Single Margin” approach.
The staff asked the Board two primary questions in Agenda Paper 14C:
Question 1: (a) Do you think that the IASB should change any of its previous decisions on the risk adjustment and residual margin with the objective of developing an approach that Board members believe would result in a more relevant and faithful representation than would result from the existing tentative decisions? (b) If so, which of the following tentative decisions would you change and why:
- The remeasurement of the amount attributed to risk at each reporting date,
- The allocation basis for the residual margin or
- The offset of changes in estimates of future cash flows in the residual margin?
Question 2: If your answer to question 1 identified any decisions that you believe the IASB should not change solely on technical considerations, should the IASB nevertheless consider changing any of those decisions if that would reduce differences with the FASB’s model, even if some or all of the other differences between the Boards, described in appendix B, remain? If so, which decisions would you change and why?
There was a significant amount of debate around the merits and technical nature of the risk adjustment. While often compared to the FASB’s single margin with a risk based pattern of release, Board members could not agree on which was a more precise measure of risk, or even which method was more operationally passable. It was clear that a number of the IASB members wanted to go to a single margin approach, although not necessarily adopting the FASB’s current model – this was principally driven by the perceived subjectivity of the risk adjustment calculation itself.
However, throughout the discussion, other Board members noted that a risk based release of a single margin was also highly subjective, and both create an opportunity for potential diversity between firms. In addition, the IASB Chairman noted that this is a path the IASB began walking down years ago, and to revisit it now potentially puts the near term progress of the project very much at risk. The IASB staff confirmed that exploring a single margin approach would take until at least September 2012 (four months) before another Agenda Paper could be brought back to a decision meeting.
Ultimately, the view to retain the risk adjustment prevailed and when asked to vote on whether to retain the risk adjustment, the IASB members yielded: 11 Yes.
The second area of discussion around the residual margin, after deciding to keep a risk adjustment and residual margin separate, was much abbreviated from the prior segment.
When asked how many IASB member wished to keep the residual margin locked, the Board yielded 4 votes.
When asked who wants to revisit unlocking residual margin for risk adjustment, the Board yielded 5 votes.
Finally, when asked who wants to confirm the existing position on the residual margin, the Board yielded 8 votes.
The IASB Chairman summarised by noting, “Clearly we are in favour of leaving it the way it is.”