Initial application of IFRS 17—comparative information (Agenda Paper 2)

At its May 2021 meeting, the Board discussed feedback about one-time classification differences that may arise in the comparative information that insurers will present on initial application of IFRS 17 and IFRS 9. The Board also discussed preliminary staff views on a possible narrow-scope amendment to IFRS 17 to address this issue.

In this session, the Board discussed the details of the narrow-scope amendment.

Staff analysis

Many insurers will first apply IFRS 9 and IFRS 17 at the same time on or after 1 January 2023. The transition requirements in the two Standards apply at different dates:

The IFRS 9 transition requirements apply on the date of initial application (i.e. 1 January 2023 for many insurers) whilst the IFRS 17 transition requirements apply on the transition date, being the beginning of the previous annual reporting period (i.e. 1 January 2022 for many insurers), or earlier if the entity voluntarily restates more than one year of comparative information.

This difference in the transition requirements will result in the following one-time classification differences in the comparative information presented on initial application of IFRS 17 and IFRS 9 by some insurers:

• Significant accounting mismatches between insurance contract liabilities measured at current value and some related financial assets measured at amortised cost
• If the entity chooses to restate comparative information for IFRS 9, classification differences between financial assets derecognised in 2022 (to which IFRS 9 will not apply) and other financial assets (to which IFRS 9 will apply)

In the staff view, this issue could be resolved by a narrow-scope amendment to IFRS 17. The amendment would permit an entity to apply a classification overlay in the comparative period(s) presented on initial application of IFRS 17 and IFRS 9.

This optional classification overlay would:

• Apply to financial assets that are related to insurance contract liabilities and to which IFRS 9 has not been applied in the comparative period(s)
• Allow an entity to classify those financial assets in the comparative period(s) in a way that aligns with how the entity expects those assets would be classified on initial application of IFRS 9
• Apply for comparative periods that have been restated for IFRS 17 (that is, from the transition date to the date of initial application of IFRS 17)
• Apply on an instrument-by-instrument basis

Staff recommendation

The staff recommended that the Board propose a narrow-scope amendment to IFRS 17 to permit an entity to apply a classification overlay in the comparative period(s) presented on initial application of IFRS 17 and IFRS 9.

Board members were also asked whether they:

• Are satisfied that the Board has complied with the applicable due process steps and should begin the balloting process to publish an Exposure Draft (ED)
• Agree with setting a 60-day comment period for the ED
• Intend to dissent from the proposals in the ED

Board discussion

Many Board members expressed support to propose an amendment, with some stating that this support is backed up by stakeholders from their respective jurisdictions.

Some Board members made drafting suggestions, for example it was suggested to make the guidance on transition clearer. One Board member asked to clarify what would be required in the comparative period when moving to IFRS 17 and when finally moving to IFRS 9. Another Board member suggested that the Basis for Conclusions (BC) to the amendment should include a list of examples of which financial assets would be eligible for the classification overlay.

There was some concern with regard to the ‘instrument-by-instrument’ choice as it could allow for ‘cherry-picking’. One Board member suggested to clarify in the BC what the objective of the ‘instrument-by-instrument’ requirement is, i.e. to receive a consistent classification outcome.

With regard to how the entity expects the financial assets would be classified on initial application of IFRS 9, the Vice-Chair said that she expects that preparers undertake a reasonable degree of analysis. One Board member suggested to explain in the ED what the Board expects in that regard.

On the comment period, one Board member advocated an even shorter period than the 60 days recommended by staff. In his view, the amendment was sufficiently narrow and interested parties sufficiently informed about the amendment to comment within 30 days. However, other Board members disagreed and stated that given the expected publication of the ED just before the summer holidays for many preparers would make a 30-day comment period extremely challenging.

When called to vote, all Board members voted in favour of the staff recommendation and gave permission to ballot. 12 of the 13 Board members agreed with the recommended 60-day comment period and no Board member indicated that they plan to dissent from the proposals in the ED.