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Insurance contracts

Date recorded:

The IASB held a meeting on 20 July 2015 to address the consequences of different effective dates of IFRS 9 Financial Instruments (IFRS 9) and the new insurance contracts Standard. At this meeting the IASB took a decision to amend IFRS 4 Insurance Contracts (IFRS 4) to permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement (IAS 39), subject to meeting certain criteria.

Addressing the consequences of different effective dates of IFRS 9 and the new insurance contracts Standard: Background (Agenda Paper 2A)

This paper describes the accounting consequences that could arise when an entity that issues contracts within the scope of IFRS 4 applies IFRS 9 together with IFRS 4. No decisions were sought in that paper.

Addressing the consequences of different effective dates of IFRS 9 and the new insurance contracts Standard: IFRS 4 approaches (Agenda Paper 2B)

This paper considers how the accounting consequences could be addressed within the context of IFRS 4, either through existing options in IFRS 4, or by modifying IFRS 4. In particular, the IASB noted that applying IFRS 9 before the new insurance contracts Standard may lead to additional accounting mismatches and temporary volatility in profit or loss. This paper considers the extent to which IFRS 4 already allows an entity to reduce any additional accounting mismatches and temporary volatility in profit or loss that could arise, and whether the IASB should make amendments to IFRS 4 that would enable entities to reduce these effects further.

The methods that are available in IFRS 4 for reducing any additional accounting mismatches and temporary volatility in profit or loss are:

  1. shadow accounting, which is a way of adjusting insurance liabilities to reduce accounting mismatches that can arise when unrealised gains and losses on assets held by the entity are recognised in the financial statements but corresponding changes in the measurement of the insurance contract liabilities are not (IFRS 4 paragraph 30);
  2. use of current market interest rates in the measurement of insurance liabilities (IFRS 4 paragraph 24); and
  3. the ability to change accounting policies for insurance contracts when financial statements are made more relevant and no less reliable or more reliable and no less relevant than before the change (IFRS 4 paragraph 22).

Potential amendments to IFRS 4 are:

  1. shadow adjustments for shareholders’ interests in underlying assets;
  2. shadow accounting for assets backing non-participating insurance contracts; and
  3. apply IFRS 9 with an adjustment which offsets the effect of IFRS 9 on profit or loss.

Staff recommendation

The Staff recommends that IFRS 4 be amended to permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39 provided that the entity:

  1. issues contracts accounted for under IFRS 4;
  2. applies IFRS 9 in conjunction with IFRS 4; and
  3. classifies financial assets as fair value through profit or loss in accordance with IFRS 9 when those assets were previously classified at amortised cost or as available-for-sale in accordance with IAS 39.

IASB discussion

One Board member asked whether the recommendation would apply to a conglomerate as a whole, the legal entity or to the insurance business. The Staff noted that there is already a limited scope in the recommendation (only applying to financial assets as fair value through profit or loss in accordance with IFRS 9 when those assets were previously classified at amortised cost or as available-for-sale in accordance with IAS 39), and stated the Staff will consider whether any further restriction is required, and bring this back to the September meeting. Several Board members commented that the scope of the amendment is very important, and that this should not apply to Banks that are subsidiaries of an insurance company.

Several Board members expressed support for option (c) of the potential amendments to IFRS 4. Reasons for this support included it is a transparent solution, it deals with most of the issues raised by constituents, it would be relatively easy to implement, and was both a pragmatic and principles-based solution. One Board member expressed concern that if options (a) and (b) continued to be considered this may extend the re-deliberation process and may lead to unexpected consequences. One Board member noted that one disadvantage of option (c) was that it would require insurers to run systems for IFRS 9 and IAS 39 in parallel. Two Board members expressed a preference for not amending IFRS 4 and to rely on disclosures to explain any additional accounting mismatches and volatility, but both stated that they would nonetheless support option (c).

Tentative decision

IASB Board members voted unanimously in favour of the Staff recommendation.

Next steps

The IASB intend to discuss the scope of amendment to IFRS 4 and whether the effective date of IFRS 9 should be deferred for the insurance industry during its September meeting.

The IASB is expected to consider the remaining technical decisions during the remainder of 2015. In particular, the Staff plans to consider the presentation of interest expense for contracts with participation features, and the differences between the general model and the variable fee approach, and whether those differences can be/need to be eliminated.

The new Standard is expected to be published in 2016, and its mandatory effective date will not be considered until after the IASB has concluded its deliberations.

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