Cover note (Agenda Paper 2)

In June 2019 the Board issued ED/2019/4 Amendments to IFRS 17.  The ED was open for comments until September 2019.

In the light of the feedback received, the Board decided, at its November 2019 meeting on its plan for redeliberating some of the matters raised by respondents on the ED. The Board tentatively decided:

• the proposed amendments the Board will confirm at a future meeting without substantive redeliberation;
• the topics for which the Board will consider further the feedback from respondents; and
• the topics for which the Board will not consider further the feedback from respondents.

At this meeting the staff will provide an analysis of the following topics:

• Proposed amendments to confirm without substantive redeliberation
• Insurance acquisition cash flows
• Reinsurance contracts held

The staff expect to present papers to the Board on the remaining topics for discussion at future meetings. The staff anticipate presenting a paper to the Board regarding the proposed effective date of IFRS 17 and the proposed extension of the IFRS 9 temporary exemption in IFRS 4 towards the end of redeliberations.

Proposed amendments to be finalised (Agenda Paper 2A)

The staff recommended that the Board finalise the following proposed amendments at this meeting:

• Scope exclusion for loans
• Contractual service margin attributable to investment services—coverage units for insurance contracts with direct participation features
• Presentation in the statement of financial position—portfolio instead of group level
• Applicability of the risk mitigation option—reinsurance contracts held
• Transition reliefs for business combinations
• Transition reliefs for the risk mitigation option—application from the transition date and the option to apply the fair value approach

For a summary of the feedback that was received on these issues, please refer to our summary from November 2019 (Agenda Paper 2B).

Board discussion and voting

There was no discussion of this paper. The Board voted unanimously to finalise all of the above amendments.

Expected recovery of insurance acquisition cash flows (Agenda Paper 2B)

For a summary of the proposed amendment, please refer to our IFRS in Focus from June 2019.

For a summary of the feedback received on the amendment, please refer to our summary from November 2019 (Agenda Paper 2B, Question 2).

The staff recommended the Board:

• a) finalise the proposed amendment to IFRS 17 that would require an entity to allocate insurance acquisition cash flows that are directly attributable to a group of insurance contracts applying a systematic and rational method:
  • i) to that group; and
  • ii) to any groups that include contracts that are expected to arise from renewals of the contracts in that group.
• b) confirm that the unit of account for an asset for insurance acquisition cash flows is the group of insurance contracts to which those cash flows have been allocated.
• c) finalise the proposed requirements for an entity to assess the recoverability of an asset for insurance acquisition cash flows if facts and circumstances indicate the asset may be impaired.
• d) finalise the proposed requirements for an entity to disclose:
  • i) a reconciliation from the opening to the closing balance of assets for insurance acquisition cash flows, showing separately any recognition of impairment losses and reversals of impairment losses; and
  • ii) quantitative information, in appropriate time bands, about when an entity expects to derecognise an asset for insurance acquisition cash flows and include those cash flows in the measurement of the group of insurance contracts to which they are allocated; and
• e) retain, unchanged, the requirement in IFRS 17 for an entity to present any asset for insurance acquisition cash flows in the carrying amount of the related portfolios of insurance contracts issued.

Board discussion

Recommendation (a)

Board members discussed as to whether guidance should be provided about what ‘systematic and rational’ means. It was mentioned that the insurer would have to update assumptions underlying that method. Board members were generally opposed to giving more guidance on this as these terms are used elsewhere in IFRS 17 and introducing guidance could have unintended consequences. It would also be difficult to link the idea of systematic and rational allocation to the estimation of cash flows.

Recommendation (c)

Board members clarified that once an entity allocates the insurance acquisition cash flows to a group of insurance contracts, they cannot be treated as a separate asset again and hence can no longer be allocated to a different group.

Recommendation (e)

Board members discussed that the asset will be allocated to future groups and that, for presentation purposes in the statement of financial position, it will be shown in the same line item as the portfolio to which those future groups will be added. There will be no separate presentation, only separate disclosure.

Board decision

All Board members supported the staff recommendations.

Reinsurance contracts held—recovery of losses (Agenda Paper 2C)

For a summary of the proposed amendment, please refer to our IFRS in Focus from June 2019.

For a summary of the feedback received on the amendment, please refer to our summary from November 2019 (Agenda Paper 2B, Question 4).

The staff recommended the Board:

• a) extend the scope of the proposed amendment to IFRS 17 to require an entity to adjust the contractual service margin of a group of reinsurance contracts held, and as a result recognise income, when the entity recognises a loss on initial recognition of an onerous group of underlying insurance contracts, or on addition of onerous contracts to that group.
• b) as a consequence of the extension of the scope of the proposed amendment, require an entity to determine the amount of a loss recovered from a reinsurance contract held by multiplying:
  • i) the loss recognised on the group of underlying insurance contracts; and
  • ii) the percentage of claims on underlying insurance contracts the entity expects to recover from the reinsurance contract held.
• c) not add the proposed footnote to IFRS 17:BC304.
• d) confirm that the amendment to IFRS 17 described in recommendation (a) above would apply only when the reinsurance contract held is recognised before or at the same time as the loss is recognised on the underlying insurance contracts.
• e) clarify, in the final amendments to IFRS 17, that IFRS 17:66(c)(ii)—for subsequent measurement of a group of reinsurance contracts held when a group of underlying insurance contracts become onerous—applies when underlying insurance contracts are measured applying the premium allocation approach.

Board discussion

Recommendation (a)

Board members questioned the staff’s change of view with the recommended extension of the scope to non-proportionate reinsurance contracts, given the staff had a strong position on ‘proportionate only’ before. The staff explained that the population of contracts benefiting from the proposed amendment in the ED was quite small. Also, as IFRS 17 is generally based on expected amounts, it seemed very strict to restrict this one aspect to contractual amounts.

The staff considered not going forward with the amendment, however, it was decided that the costs of the amendment, for example for tracking the loss recovery component, would be smaller than the benefits.

It was asked whether it was not possible to find a more granular solution, rather than to just extend the scope to all. The staff replied that the reasons for the accounting mismatch really apply to all reinsurance contracts, and hence the scope should reflect that.

Board members mentioned that more discussion should be added with regard to the example that an entity has reinsurance contracts with the right to recover only over a certain level of claims and the entity had only written few insurance contracts. In that case it should be explained why the entity would still recognise a gain, even if it is uncertain that those contracts will give rise to enough claims to pass the threshold.

Recommendation (b)

Board members observed that the calculation would start with the groups of reinsurance contracts and then match those to underlying contracts to calculate the expected recovery percentage. It was also observed that the assumptions in the calculation build on the expectations of cash flows analysis for insurance contracts and should therefore be consistent.

Board decision

All Board member supported the staff recommendations.