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Insurance and IFRS 9

Date recorded:

The papers summarised the feedback received by IASB on its Exposure Draft (the ED) addressing the effects of the misalignment of the effective dates for IFRS 9 (effective from periods beginning on 1 January 2018) and the new IFRS on insurance contracts (effective date not yet decided by the IASB but expected to be at least two years later than IFRS 9).

The Board received 95 comment letters from preparers, accounting and actuarial bodies, regulators and national standard setters. The comments received are summarised in paper 14A. The Board has also conducted extensive outreach activities with users over August-September 2015 and November 2015-March 2016 periods. The feedback from users is summarised in paper 14B. Paper 14C sets out the proposed direction for the Board’s redeliberations, gives Staff recommendations on the key issues and suggests a project plan.

The majority of preparers agreed with the concerns raised in the ED and thought that a solution is required, but agreed that such solution should be optional. Most of the preparers argued that the deferral approach is the only approach that would address all their concerns. Some groups combining banking and insurance businesses favoured the overlay approach. Regarding the scope of the deferral approach, the majority of respondents thought it was too narrow. However, while most of the regulators would prefer to apply the deferral approach only at the reporting entity level as proposed in the ED, the majority of the preparers, accounting bodies and national standard setters would favour permitting it at below the reporting entity level. This would mean that in the same consolidated financial statements there may be qualifying insurance subsidiaries which could opt for continuing to apply IAS 39 while the rest of the group would be required to apply IFRS 9. Regarding the ‘sunset clause’, respondents had mixed views, with most of the preparers wishing to defer the application of IFRS 9 until the effective date of the new IFRS on insurance contracts becomes known, while most of the regulators, some auditors and national standard setters preferring a fixed expiry date. The Board is due to select the mandatory effective date for the new IFRS on insurance contracts in the next few months.

The population of users involved in the outreach was mostly from Europe (50%), Australia (20%) and Asia (20%) with the rest split between North and South America. In the second outreach period the Board enquired a greater proportion of users following conglomerates and financial institutions, rather than the insurance industry only. There have been mixed views on the concerns raised in the ED. Many users replied that increased volatility in profit or loss from applying IFRS 9 would not affect their analysis because they focus on other metrics and commented that there is no need for the solutions proposed by the ED. Others (mainly from Europe and Asia) viewed the increased volatility as unhelpful and expressed a preference for the overlay approach over the deferral approach. They also agreed that any approach should be applied only at the reporting entity level. The majority of users considered having two optional approaches a reduction in comparability and preferred, if any approach was introduced, a single mandatory approach for qualified entities. Most users supported the ‘sunset clause’.

Considering the feedback received the Staff was asking the Board to confirm that:

  • Entities should be able to qualify for both a deferral or an overlay approach;
  • Both approaches should be optional;
  • The assessment of the eligibility for the deferral approach should be performed at the reporting entity level only; and
  • There should be a fixed expiry date for the deferral approach (‘the sunset clause’).

The paper also provided a proposed project plan. The April 2016 meeting would aim to deliberate on the deferral approach with the following month dedicated to the deliberations on the overlay approach. Finally, the Board was be called to vote on the fixed expiry date for the deferral approach and the application of either approaches for first time adopters of IFRS. The Staff is planning to discuss permitting a narrow exemption from applying uniform accounting policies for entities using the equity method for investments in associates and joint ventures where the accounting for financial assets may follow a different approach to the one adopted by the investor.

Board discussion

Agenda Paper 14A - Summary of comment letters and outreach

A Board member stated that he was not convinced that if IFRS 9 is implemented in 2018 there would be incremental costs as extensive as suggested by some respondents. He considered that IFRS 9 will provide useful information, including expected credit losses, which would not be a wasted cost. He noted that more volatility may arise, but this would be economic volatility, not volatility arising from accounting mismatches. He also noted the concerns raised by a few respondents about the tax and regulatory impact that may arise, but commented that there had been a consistent lack of empathy about these issues by the Board.

Another Board member stated that she found the arguments about the cost of implementing the overlay approach difficult to understand as insurers currently need to have fair values for disclosure purposes, and she noted that those respondents who stated that they intended to adopt the overlay approach considered that the costs would not be burdensome.

One Board member felt that insurance activities could be reported under IAS 39 in the segmental reporting, but noted that volatility would still arise in equity as the overlay approach would only result in the difference in measurement between IAS 39 and IFRS 9 moving from profit or loss to OCI. He noted that different classifications of financial assets would be possible if both IAS 39 and IFRS 9 were applied by the reporting entity at the same time and comparability would be more difficult to achieve than if the entity used only IAS 39 or IFRS 9.

A Board member stated that investors compared bankassurers to banks rather than to insurers, therefore the impact of applying IFRS 9 at the reporting level was important.

Another Board member stated that it was important to have a fixed expiry date for the temporary exemption from applying IFRS 9, whether this was 2021 or some other date. Without this the Board would be inviting more disagreement on the proposed solution. However another Board member observed that the Board would probably allow a further deferral in the implementation date of IFRS 9 if it considered this to be necessary due to unexpected delays in the publication of the new IFRS on insurance contracts.

The Staff noted that feedback had been received on two proposals about which the Board did not ask for comment. These were (1) IFRS first-time adopters would be prohibited from applying the overlay approach and the temporary exemption, and (2), an entity may be required to apply different accounting requirements to its investment in associates and joint ventures. After limited discussion it was agreed that these were valid points which needed to be considered further.

Agenda Paper 14B - Summary of feedback from the users of financial statements

The Staff noted that many users had stated that they used OCI metrics in addition to information in the profit or loss and that confusion would arise if there were too many options. Many users supported the overlay approach with a single presentation approach being permitted. Few favoured the deferral approach, but if this was an option, this should be at the reporting entity level. The majority of users preferred that any approach the Board will eventually select it should be made mandatory rather than optional. All users considered that having an expiry date was important.

One Board member considered that the expected loss model will provide useful information, and that investors agreed that the benefits of this would exceed its cost. He stated that most insurers have a credit risk management unit and the information required by IFRS 9 should be available. Differing views were expressed about the extent to which it would be necessary to maintain two systems to produce both IAS 39 and IFRS 9 information.

In response to a question by a Board member, the Staff stated that there had been responses by 18 standard-setters, who supported the option to introduce both the overlay and the deferral approach and recommended that the deferral approach is applied at both the reporting entity level and below.

Agenda paper 14C - Project direction and plan

A Board member asked why, despite users not supporting the deferral approach, it remained a Staff recommendation. The Staff responded by stating that their recommendation took into account the views of all respondents and the views of several Board members.

Another Board member stated that the potential for accounting mismatches is more important than the cost considerations. The overlay approach will introduce some costs, and although deferring IFRS 9 would solve the accounting mismatch and cost issues, the deferral approach should only be available in limited circumstances particularly because credit loss information would not be reported in those entities. Given this inherent weakness the Board would need to consider further the disclosure requirements under the deferral approach.

A further Board member stated that she felt that the overlay approach would not result in prohibitive costs, but the deferral approach was a cleaner solution for an insurer. She felt uncomfortable about straying outside of user preference, but the proposed definition of the scope restriction for deferral by ‘pure insurers’ would cause fewer problems for users, therefore she felt that the Staff recommendations achieved a reasonable balance between the differing views.

A Board member stated that having consistent accounting policies was a compelling reason not to move to having a mixed IAS 39 and IFRS 9 model, and another Board member felt that a mixed model would result in a lack of transparency. A further Board member stated that there were two extenuating circumstances to this view, being (1) staying with IAS 39 was a simple approach, and (2) there would be no change to existing accounting for a limited period. However, he felt that the benefits of both of these would be reduced if the deferral approach was applied below the reporting entity level, as there would be a mixture of IAS 39 and IFRS 9 accounting which would add costs and complexity for users. Another Board member noted that added complexity would also arise to explain the accounting treatment of financial assets transferred within a reporting entity where a different accounting policy applied. 

A Board member stated that the temporary expiry date needed to be for a short period, and he felt that preparers should be encouraged to adopt IFRS 9 before the expiry date. He was against the overlay approach because of the loose designation basis proposed in the ED.

Tentative decisions - Project direction

The Board was asked to agree to confirm the following matters:

  1. The ED proposal to provide a temporary exemption from applying IFRS 9 for qualifying entities.

    The Board approved the Staff recommendation with 11 members voting for and 3 against.

  2. The ED proposal that the eligibility for the temporary exemption should be determined at the reporting entity level only.

    The Board approved the Staff recommendation with 13 members voting for and 1 against.

  3. That there should be a fixed expiry date for the temporary exemption.

    The Board approved the Staff recommendation with 13 members voting for and 1 against.

  4. The ED proposal to provide an overlay approach.

    The Board approved the Staff recommendation with 13 members voting for and 1 against.

  5. The ED proposal that the temporary exemption from applying IFRS 9 and the overlay approach should be optional.

    The Board unanimously approved the Staff recommendation.

The project plan sets out the issues that the Board will consider in April and May 2016. The main topics are (1) the deferral approach ( referred to as the “temporary exemption”) (2) the overlay approach (3) other issues, including the fixed expiry date for the deferral approach and whether it should also apply to the overlay approach, whether IFRS first-time adopters would be permitted to apply the overlay and/or the deferral approach, whether an exemption should be provided from requiring the entity’s financial statements to be prepared using uniform accounting policies when accounting for investments in associates and joint ventures and (4) due process and permission to ballot.

There were no comments on the project plan.

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