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Insurance and IFRS 9

Date recorded:

Agenda Paper summaries

There were six agenda papers prepared for the May Board meeting. The first paper 14A contained the summary of previous tentative decisions. Paper 14B looked at the need or option to reassess the eligibility criteria for the temporary exemption from applying IFRS 9 (the deferral approach). The fixed expiry date for the deferral approach, the possibility of expiry date of the overlay approach and some other matters on transitioning to IFRS 9 were discussed in paper 14C. Paper 14D examined the need for an optional exception to the requirement for the reporting entity to have uniform accounting policies for investments in joint ventures or associates where one of the parties (either investor or investee) applies the deferral or overlay approaches and the other party does not. Paper 14E looked at the applicability of the deferral and overlay approaches to first time adopters and paper 14F considered the due process steps and asked the Board’s permission for balloting.

The requirement or option to reassess eligibility criteria for deferral approach (14B)

Given the narrow applicability criteria for the deferral approach, it is proposed that the reporting entity would need to reassess its criteria following a corporate structure change. The issue only arises for changes in the corporate structure taking place after the initial assessment date (annual reporting date between 1/4/2015 and 31/3/2016). Changes in the predominance ratio not linked to changes in corporate structure, for example changes due to the relative size of liabilities balances do not trigger reassessment. Following the change in the corporate structure, the entity would need to recalculate the predominance ratio as at the end of the annual reporting period during which the business change occurred. If, based on the predominance ratio as of that date the entity is no longer eligible for the deferral approach, it will be required to apply IFRS 9 from the beginning of the second annual period following the change.

Additionally, an entity that has not applied any version of IFRS 9 (other than the presentation of own credit risk provisions) and previously did not qualify for the deferral approach but subsequently, following a demonstrable change in the entity’s corporate structure, does qualify then such an entity is permitted to apply the deferral approach. Additional disclosures are proposed both for entities that no longer qualify for the application of the deferral approach and for those entities that become eligible subsequently.

Example

Calendar annual periodMandatory reassessmentOptional reassessment
2015 Initial assessment of eligibility for deferral approach based on predominance ratio at the closing balance sheet date for annual period ending between 1/4/2015-31/3/2016
Entity is eligible for deferral Entity is not eligible for deferral
2016    
2017    
2018 Significant change in corporate structure occurs, for example the Group acquires a bank. Required to reassess eligibility. If no longer eligible, the Group discloses that fact. Significant change in corporate structure occurs, for example the Group sells a bank. Permitted to reassess eligibility, provided has not yet applied IFRS 9, including from the disclosures in any 2018 interim financial statements. If meet eligibility criteria, the Group can apply the deferral approach and provide additional disclosures.
2019 Disclose the fact that no longer eligible for deferral Can apply deferral method
2020 Apply IFRS 9 Can apply deferral method
2021 All entities would be applying IFRS 9 (sunset clause)

Decisions

The Board unanimously approved the Staff recommendations in relation to:

(a)    the mandatory reassessment of eligibility for the temporary exemption from applying IFRS 9;

(b)   the optional reassessment of eligibility for the temporary exemption before the mandatory effective date of IFRS 9; and

(c)    that a demonstrable change in an entity’s corporate structure that could result in a change in its predominant activities must be significant to its operations and demonstrable to external parties.

Discussion

A Board member sought clarification about how broadly a ‘change in corporate structure’ should be interpreted. The Staff stated that this should be considered when there was a significant change in the business, such as acquiring a bank or disposing of an insurer, and that it was not the intention that a reporting entity should drift in and out of the eligibility for the temporary exemption from applying IFRS 9.

A Board member questioned whether the existence of a definitive agreement to e.g. sell an insurance subsidiary at the reassessment date for eligibility before the mandatory effective date of IFRS 9, but where the deal had not closed, should be taken into account. The Staff confirmed that a commitment to sell was not sufficient, and that a sale must have taken place at the reassessment date.

Fixed expiry date and transition to IFRS 9 (14C)

The paper reaffirms that the deferral approach will be available for annual periods beginning on or after 1 January 2018. The fixed expiry date for the application of the deferral approach, referred to as ‘the sunset clause’, would remain consistent with the ED as the earlier of the application of the new insurance IFRS or the annual periods beginning on or after 1/1/2021. The entity may voluntarily cease applying the deferral approach at the beginning of any subsequent annual reporting period. On applying IFRS 9 (whether the entity choses to or is required) it would be subject to the transitional requirements of that standard. On application of IFRS 9 the entity would still have an option to apply the overlay approach to qualifying assets. It is proposed that the overlay approach remains available under IFRS 4 with no fixed expiry date. The overlay approach will effectively disappear with the introduction of the new insurance IFRS that will replace IFRS 4.

Decisions

The Board unanimously approved the Staff recommendations:

(a)    that an entity should be required to cease applying the deferral approach no later than for annual reporting periods beginning on or after 1/1/2021;

(b)   to permit an entity that previously applied the deferral approach to choose to apply IFRS 9 rather than IAS 39 at the beginning of any subsequent annual reporting period; and

(c)    in respect of transition when an entity stops applying the deferral approach.

The Board also approved by 13 votes for and 1 vote against the Staff recommendation that there should not be a fixed expiry date for the overlay approach.

Discussion

A Board member questioned whether it made sense to continue to apply the overlay approach if there was an unexpected delay in issuing the new insurance contracts Standard. Other Board members expressed the view that this would be appropriate in those circumstances.

Relief for investors in associates and joint ventures (14D)

Under IAS 28, entities accounting for investments in associates or joint ventures in applying the equity method are required to adjust the financial statements of the investees to ensure uniform accounting policies with those of the investor. However, where either the investor or the investee apply the deferral or the overlay approach, the cost of maintaining uniform accounting policies may be high. As a result, the paper proposes a relief from IAS 28:33-36 to allow non-uniform accounting policies in the financial statements of the investor that include the results of the associate or joint venture using the equity accounting method. The proposed relief is optional and would be available on an investment-by-investment basis. Analogy has been made for a similar relief already contained in IAS 28 for investors in investment entities. Additional disclosures are proposed to meet the requirements for summarised information in IFRS 12 for individually material investments and for those not individually material but material in aggregate.

Decisions

The Board unanimously approved the Staff recommendations.

IASB discussion

A Board member stated that she supported the proposals on cost/benefit grounds and because there was no significant loss of information.

In response to a question asked by another Board member, the Staff confirmed that the proposed disclosures would be required even if both the investor and the investee were applying the overlay approach.

A Board member stated that the Standard should make it clear that judgements in respect of the relief should be based on the facts and circumstances, that it must be difficult to get information from the investee, and that it was not a free choice. Another Board member disagreed with this view as she felt that it would be quite a nuanced decision.

In response to a question by a Board member the Staff confirmed that the option would be irrevocable.

Applicability of the overlay approach and the deferral method for first time adopters of IFRS (14E)

The ED proposed that both the overlay and deferral approaches would not be applicable to first time adopters of IFRS on the grounds that these entities have not previously produced IAS 39 information, and given they would be starting from a ‘clean page’ they should adopt the most recent version of IFRS in full. However, concerns were raised about the cost of transition to IFRS 9 for those entities who already applied accounting for financial instruments similar to the requirements of IAS 39 (some UK GAAP entities and Singapore GAAP entities). Similarly, in the group context, entities not applying IFRS may have nevertheless prepared IAS 39 information for group reporting purposes. As a result the paper proposes to extend the option to apply the overlay and deferral approaches to first time adopters. An entity applying the deferral approach would need to assess eligibility based on the IFRS amounts of liabilities. An entity applying the overlay approach to qualifying assets would need to restate IFRS 1 comparatives to also reflect the overlay approach.

Decision

The Board unanimously approved the Staff recommendation.

Discussion

There was no significant discussion on this issue.

Due process and permission to ballot (14F)

The paper discusses the due process steps taken by the IASB including the exposure of the draft for comment, publication of the comment letters, discussion of the comments received in the public meetings and the analysis of the likely effects of the forthcoming standard on relevance and reliability of information, comparability and the likely cost to preparers and users. It presents the analysis and acknowledges that while the introduction of optional deferral method and overlay approach reliefs reduces comparability, this is mitigated by the narrow scope, narrow application window, additional required disclosures and the likelihood of similar accounting policy choices being made by entities in the same jurisdiction.

Decisions

The Board unanimously agreed that the amendments to IFRS 4 should be finalised without re-exposure.

The Board unanimously confirmed that it was satisfied that the due process requirements have been met and that it has undertaken sufficient consultation and analysis to begin the balloting process for the amendments.

One Board member intends to dissent from the publication of the amendments because she considers that information would be lost as a consequence of not implementing IFRS 9.

Discussion

There was no discussion on these issues.  The Board proceeded straight to a vote.

Publication date

The Staff stated that they still expected the amendments to IFRS 4 to be issued in September 2016.

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