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Amendments to IFRS 17

Date recorded:

Sweep issues (Agenda Paper 2)

In March 2020, the Board gave permission to begin the balloting process for finalising the amendments proposed in Exposure Draft ED/2019/4 Amend­ments to IFRS 17. In this session, the Board discussed sweep issues identified during the balloting process.

Issue A—Pre-recognition cash flows other than insurance acquisition cash flows

Issue

IFRS 17 has specific requirements for insurance acquisition cash flows that are paid before a group of insurance contracts is recognised—an entity recognises those cash flows as an asset, which the entity derecognises when it recognises the group of insurance contracts thereby adjusting the contractual service margin (CSM) on initial recognition of the group. The staff note there could be other cash flows related to a group of insurance contracts that are paid or received before the group is recognised—for example, premiums paid in advance of their due date. IFRS 17 is silent on the accounting for those other cash flows. In particular, IFRS 17:38 does not allow for their inclusion in the calculation of the CSM on initial recognition.

Staff recommendation

The staff recommended that the Board amend IFRS 17 to require an entity to include in the initial measurement of the CSM of a group of insurance contracts the effect of the derecognition of any asset or liability previously recognised for cash flows related to that group paid or received before the group is recognised.

Board discussion and voting

There was no discussion on this issue. All Board members supported the staff recommendation.

Issue B—Reinsurance contracts held—identifying losses on underlying insurance contracts

Issue

The Board is amending IFRS 17 to require an entity to recognise in profit or loss recovery of losses from reinsurance contracts held when losses are recognised on initial recognition of onerous insurance contracts that are covered by the reinsurance contract held (underlying insurance contracts). IFRS 17 already includes a similar requirement when underlying insurance contracts become onerous subsequently (or become more or less onerous subsequently). To determine the amount of recovery of losses from reinsurance contracts held, an entity needs to identify losses on the underlying insurance contracts. When grouping insurance contracts issued, an entity might group together: (a) onerous insurance contracts that are covered by (ie that are underlying) the reinsurance contract held; and (b) other onerous insurance contracts, which are not covered by the reinsurance contract held. IFRS 17 does not require an entity to identify or subsequently track the amount of losses on onerous contracts at a level that is lower than the group level. Therefore, if an entity groups together onerous underlying insurance contracts and other onerous insurance contracts, the entity might not have the information available to identify the amount of losses on underlying insurance contracts for the purpose of determining the amount of recovery of losses from reinsurance contracts held.

Staff recommendation

The staff recommended that the Board amend IFRS 17 to require an entity, in the circumstances described above, to use a systematic and rational method of allocation to apply the requirements in IFRS 17 relating to the recovery of losses from reinsurance contracts held, as described above.

Board discussion and voting

The staff notified the Board that they had received some feedback that sometimes more granular information is available. The staff highlighted that the allocation on a systematic and rational method does not prohibit entities from using a more granular approach, if available.

One Board member was concerned that giving specific guidance on this issue might raise questions as to what to do in other situations when estimation is needed. IFRS 17 states that estimation is necessary to account for insurance contracts, which should be enough to guide preparers. The staff replied that they believe the specificity is needed in this case as the proposed guidance allows to measure contracts below a group level, which is not in line with the general requirement of IFRS 17 to measure insurance contracts at a group level.

The Vice-Chair raised a similar concern that if the more granular information is available without undue cost or effort, this amendment would allow them to not do it. She suggested that the amendment should only be available to those who cannot gather the granular information without undue cost or effort. One Board member disagreed and said an ‘undue cost or effort’ test would have to be performed on an ongoing basis, which might be onerous.

12 of the 14 Board members supported the staff recommendation.

Issue C—Insurance revenue—income tax

Issue

The Board is amending IFRS 17 to resolve an inconsistency between IFRS 17:B66(f) and B65(m). After that amendment, an entity would apply IFRS 17:B65(m) to include in the fulfilment cash flows the income tax payments and receipts that are specifically chargeable to the policyholder under the terms of an insurance contract. The intended consequence of the amendment is for an entity to recognise insurance revenue for the consideration paid by the policyholder for those income tax amounts in a manner consistent with the recognition of insurance revenue for other incurred expenses applying IFRS 17. However, to achieve this intended consequence, the staff note that a further amendment is needed to one of the paragraphs containing the revenue requirements in IFRS 17.

Staff recommendation

The staff recommended that the Board amend IFRS 17 to require an entity to recognise insurance revenue when the entity recognises in profit or loss amounts related to income tax that are specifically chargeable to the policyholder under the terms of an insurance contract.

Board discussion and voting

There was no discussion on this issue. All Board members supported the staff recommendation.

Issue D—Definitions of the liability for remaining coverage and the liability for incurred claims

Issue

During the Board’s redeliberations, the staff noted that some respondents to the ED had raised comments or questions regarding the definitions of the liability for remaining coverage and the liability for incurred claims, and that the staff would consider those comments in drafting the final amendments. Some respondents said that the proposed definitions reflect some, but not all, of an entity’s obligations arising from insurance contracts. For example, an entity might have an obligation to pay other amounts relating to the provision of insurance contract services—such as refunds of premiums to the policyholder or expenses payable to third parties. In addition, an entity might have an obligation to pay amounts not related to the provision of insurance contract services—such as some types of investment components. The carrying amount of a group of insurance contracts is the sum of the liability for remaining coverage and the liability for incurred claims, and the measurement reflects all of an entity’s obligations arising from the group of insurance contracts. Some respondents suggested the Board amend the definitions of the liability for remaining coverage and the liability for incurred claims for completeness to reflect all obligations arising from insurance contracts issued by an entity, consistent with the requirements for measuring those liabilities.

Staff recommendation

The staff recommended that the Board amend IFRS 17 to include in the definitions of the liability for remaining coverage and the liability for incurred claims all obligations arising from insurance contracts issued by an entity.

Board discussion and voting

No discussion was held on this topic. All Board members supported the staff recommendation.

Issue E—Variable fee approach—applying together the OCI option and the risk mitigation option

Issue

The other comprehensive income (OCI) option in IFRS 17 has two methodologies for determining the amount of insurance finance income or expenses to be recognised in profit or loss. An entity can choose whether to include part of insurance finance income or expenses in OCI (rather than entirely in profit or loss), but if it chooses to use OCI it cannot choose which methodology to apply for determining the amounts in profit or loss and OCI. The methodology depends on the circumstances:

  • (a) if the group of contracts is a group of variable fee approach contracts and the entity holds the underlying items, the entity must use the current period book yield; and
  • (b) for all other groups of contracts, the entity must use an effective yield approach.

An entity applying the OCI option and that is required to use the current period book yield might also elect to apply the risk mitigation option in IFRS 17. If so, an accounting mismatch will arise.

Staff recommendation

The staff recommended that the Board amend the OCI option and the risk mitigation option in IFRS 17 to:

  • (a) specify that IFRS 17:88 and 89 do not apply to the insurance finance income or expenses that arise from the application of the risk mitigation option; and
  • (b) add new requirements to the risk mitigation option that specify how to present insurance finance income or expenses that arise from the application of the risk mitigation option.

Board discussion and voting

One Board member said that it has now become clear that the OCI option has led to much added complexity in the Standard and the Board should remember this when developing new Standards in the future from a cost-benefit perspective. All Board members supported the staff recommendation.

Sweep Issues—Addendum (Agenda Paper 2A)

The following issues arose after Agenda Paper 2 was posted and have been published in an addendum to Agenda Paper 2:

Paragraph B96(c) of IFRS 17

Issue

IFRS 17:B96(c) sets out requirements for the effects of investment components unexpectedly paid or unexpectedly not paid. If it was not expected to be paid, there will be two effects:

  • the unexpected payment in the period; and
  • a reduction in the expected cash outflows in future periods.

IFRS 17:B96(b) requires the effect described in (b) to adjust the CSM. IFRS 17:BC235 explains that the Board did not think it would provide useful information for a gain or loss to be recognised for the effect described in (a) and a corresponding decrease or increase in the CSM for the effect described in (b). Hence, IFRS 17:B96(c) requires the effect described in (a) of this paper also to adjust the CSM.

Between the beginning of the period and the unexpected payment or non-payment of the investment component, the investment component will be affected by the time value of money and may be affected by financial risk and changes in the time value of money and financial risk. Those effects might be as expected at the beginning of the period, or might differ from that expected at the beginning of the period. In either case, the effects should be recognised as insurance finance income or expenses, and should not adjust the CSM.

Staff recommendation

The staff recommended a change to the wording of the ED so that the intention is clear.

Board discussion and voting

There was no discussion on this issue. All of the Board members supported the staff recommendation.

Assets and liabilities for cash flows related to a group of insurance contracts recognised before the group is recognised

Issue

Feedback on the staff recommendation for Issue A of Agenda Paper 2 is that it should apply not just to assets or liabilities previously recognised because the cash flows were paid or received before the group of insurance contracts is recognised. Rather, it should also apply to assets and liabilities previously recognised because of the requirements of another IFRS Standard even if no cash flows have occurred.

Staff recommendation

The staff recommended the requirements in IFRS 17 for the recognition of an asset for insurance acquisition cash flows be amended to achieve the above outcome. No amendment is needed in relation to assets and liabilities for cash flows related to a group of insurance contracts other than insurance acquisition cash flows because IFRS 17 does not include specific requirements for such assets and liabilities that would restrict them from arising only from cash flows paid or received.

Board discussion and voting

There was no discussion on this issue. All Board members supported the staff recommendation.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.