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Insurance contracts

Date recorded:

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

In this session, the Board discussed the presentation of comparative information on initial application of IFRS 17 and IFRS 9.

Insurers apply IFRS 9 from 1 January 2023 retrospectively, with some specific exceptions and reliefs. The restatement of comparative information is not required but is permitted if it is possible to do so without the use of hindsight. Retrospective application applies for all financial assets in the scope of IFRS 9 that continue to be recognised at the date of initial application. An entity is prohibited from applying IFRS 9 to assets derecognised before that date.

During the Amendments to IFRS 17 project some stakeholders asked the Board to amend IFRS 9 so that insurers could apply IFRS 9 from the transition date of IFRS 17 (i.e. 1 January 2022) rather than from the date of initial application (i.e. 1 January 2023). This would allow insurers to apply IFRS 9 to financial assets derecognised during the comparative period. In the Board’s view, it had not received evidence that suggested that such an amendment was necessary.

Some insurers have since raised concerns about the usefulness of the information that would be presented for financial assets in the comparative period on initial application of IFRS 17. They are of the view that such information would be misleading because it would include accounting mismatches that would essentially arise from the continued application of IAS 39 (i.e. would not represent economic mismatches), which would be very difficult to explain. These insurers asked the Board to allow them to present significantly improved information about financial instruments that would result from applying the classification requirements of IFRS 9 at the transition date of IFRS 17.

Some insurers plan to voluntarily provide restated comparative information on initial application of IFRS 9 alongside the required restated comparative information for IFRS 17, because doing so improves the understandability of the comparative information provided on initial application of the two Standards. It would, for example, enable insurers to apply the fair value option for financial assets accounted for applying IFRS 9 to reduce accounting mismatches.

Regardless of the feedback, the staff continue to agree with the Board’s previous decision not to amend IFRS 9. However, they are sympathetic to the concern expressed. The staff note that IFRS 9 introduces significant improvements in accounting for financial instruments, including simpler and principle-based classification requirements, that would enhance the usefulness of information provided to users of financial statements. These improvements are particularly important for insurers because they hold significant financial assets related to their insurance contract liabilities.

The staff therefore think the Board could consider adding a specific transition requirement to IFRS 17 to enable insurers to present comparative information on a basis that is consistent with how IFRS 9 would be applied going forward, without unnecessarily disturbing the transition requirements in IFRS 9.

The staff think that if the Board were to consider an amendment to address this issue, that amendment should be a new requirement in the IFRS 17 transition requirements, and that it should be targeted to reduce the risk of unintended consequences. Hence, it should:

  • Apply only for the purpose of presenting comparative information on initial application of IFRS 9 and IFRS 17
  • Not result in the application of the expected credit loss requirements of IFRS 9 to financial assets derecognised during the comparative period
  • Not change the transition requirements in IFRS 9

They also think such an amendment should be optional for entities. This would avoid disrupting implementation and creating further work for entities that do not need an amendment to address accounting mismatches.

This could be achieved through an optional classification overlay approach that permits insurers, to the extent that IFRS 9 was not applied to all or a particular financial asset in the comparative period, to classify financial assets related to insurance contract liabilities in a way that would achieve greater consistency with the classification determined on initial application of IFRS 9.

Therefore, an insurer applying this classification overlay approach would present comparative information that would:

  • Provide improved information about classification of financial instruments that will enable improved analysis by users of financial statements
  • Avoid significant accounting mismatches that would not arise if IFRS 9 were applied, hence would be artificial and misleading to users of financial statements
  • Provide information about classification of financial assets that is expected to be generally consistent with that presented from the initial application of IFRS 9, enhancing comparability between periods.

To achieve this, the staff think the optional approach would need to have the following characteristics:

  • It would permit an insurer, to the extent that IFRS 9 was not applied to all or particular financial assets in the comparative period, to elect to apply a classification overlay that would achieve greater consistency with the classification determined on initial application of IFRS 9
  • It would apply only:
    • To a financial asset that is related to insurance contract liabilities
    • If the information needed to apply the classification overlay approach was obtained at the transition date of IFRS 17 and thus the approach can be applied without the use of hindsight

The staff noted that if the Board were to propose the classification overlay approach as a narrow-scope amendment, to provide the intended relief for entities transitioning to IFRS 17, it would need to be finalised and endorsed before 1 January 2023. They also note that to apply any such narrow-scope amendment entities would need to begin collecting information from 1 January 2022. Hence, to provide certainty to stakeholders, the staff would aim to finalise the narrow-scope amendment by the end of this year.

The staff asked whether Board members have any views, questions or comments on the staff view and potential next steps, that would help them further refine a possible narrow-scope amendment to IFRS 17.

Board discussion

Many Board members expressed support for the proposed narrow-scope amendment. The Vice-Chair explained that while she had previously not seen the need to address this issue, the fact that insurers informed the Board of the magnitude while being very progressed in the implementation process has convinced her. As this is a very targeted amendment, she does not see the risk of disturbing implementation processes. Especially, as it does not bring forward the IFRS 9 classification requirements to the beginning of the comparative period. She acknowledged the challenges the staff will face when scoping the amendment and recommended that drafting should not be too granular. She suggested that the amendment should be drafted similarly to the fair value option, but warned not to use the exact words as practice had already developed on the existing words and the interpretation might be too narrow.

One Board member said that it should be communicated that this is a very specific issue and the amendment is proposed with the intention to provide better information. He said that many investors will use the first report issued under IFRS 17, which will be Q1 or H1 of 2023 and for those, it will increase comparability with the comparative period. This was echoed by a Board member who raised the question what it would mean for entities that present more than one comparative period. One Board member suggested the staff examine criteria for the application of the proposed overlay in additional comparative periods.

Another Board member asked whether the focus was still on financial assets derecognised in the comparative period, or if there would now be more assets that come into scope. The Vice-Chair confirmed that the focus would still be assets derecognised in the comparative period, however, the overlay would also apply to assets where the entity elects to apply IAS 39 for the comparative period.

One Board member said that it should be made clear that this is an overlay onto IAS 39 and not IFRS 9. The overlay applies if certain criteria are met and the requirements in IFRS 9 remain unchanged. She also highlighted that it is an instrument-by-instrument election. One Board member added that the amendment should explain why an instrument-by-instrument election is appropriate. She also said that it should be clearly communicated how the overlay approach works and how it is different from a retrospective application of IFRS 9 to the assets in scope. A Board member added that it should nonetheless be clear that the result is an application of the IFRS 9 classification and measurement requirements, except for impairment. The Vice-Chair agreed and said that the outcome would be consistent with IFRS 9.

No decisions were made.

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