Multi-currency Groups of Insurance Contracts (IFRS 17 and IAS 21)

Date recorded:

IFRS 17 Insurance Contracts and IAS 21 The Effects of Changes in Foreign Exchange Rates—Multi-currency Groups of Insurance Contracts (Agenda Paper 2)


In its June 2022 meeting, the Committee discussed a submission about the application of IFRS 17 and IAS 21 to a group of insurance contracts with foreign currency cash flows. The submission asked whether an entity considers currency exchange rate risk when applying IFRS 17 to identify portfolios of insurance contracts; and how an entity applies IAS 21 in conjunction with IFRS 17 in measuring a multi-currency group of insurance contracts. The staff concluded that currency risk is considered when identifying portfolios of insurance contracts and an entity uses its judgement in developing and applying an accounting policy for measuring a multi-currency group of insurance contracts. Most of the Committee members agreed with the technical analysis and with the staff recommendation not to add the matter to the Committee’s standard-setting agenda and to publish a tentative agenda decision instead.

18 comment letters were received. 17 respondents agreed (or did not disagree) with the Committee’s conclusion regarding identifying portfolios of insurance contracts. 11 respondents agreed (or did not disagree) with the Committee’s conclusions regarding the measurement of a multi-currency group of insurance contracts while 7 respondents expressed concerns that an entity could develop a multi-currency accounting policy.

Staff analysis

Almost all respondents agreed (or did not disagree) with the Committee’s conclusion that an entity is required to consider all risks, including currency exchange rate risks, when identifying portfolios of insurance contracts. However, one respondent said the conclusion permits or requires consideration of risks the contract creates in addition to risks the contract transfers from the policyholder to the insurer and this could result in an inappropriately high level of aggregation. The staff disagreed with this given not all risks arising from an insurance contract will have the same effect on the assessment, and all the risks will need to be considered together to assess whether, overall, the insurance contracts are subject to similar risks.

All respondents agreed that an entity could develop a single-currency accounting policy but not all respondents agreed that an entity could develop a multi-currency accounting policy. One respondent said the multi-currency accounting policy does not comply with IFRS 17:B97(a)(i) which requires an entity not to adjust the CSM for changes in financial risk. The staff disagreed because the accounting policy in the tentative agenda decision determines how the entity calculates exchange differences in IAS 21 as it determines the currency or currencies from which the entity translates amounts into its functional currency. Such exchange difference does not form part of the accounting applying IFRS 17. Only changes in exchange rates that the entity does not account for as exchange differences in IAS 21 are changes in financial risk in IFRS 17.

Some respondents said applying the multi-currency accounting policy could cause the CSM to become negative even though the group of contracts is profitable. The agenda paper illustrated the calculation for a euro functional currency with the CSM denominated in US dollars and pounds sterling. After translating the foreign currencies, the euro CSM was negative. They said IFRS 17:38 does not allow the CSM to be negative because the CSM represents the unearned profit of the group of insurance contracts, and this results in the entity limiting the CSM to nil and recognising the negative amount as a loss. In such scenario, the entity would recognise both a credit entry (the exchange gain) and a debit entry (the loss) in profit or loss which may seem counterintuitive. At the same time, this could make the group of contracts appear to be onerous even though there were no unfavourable changes relating to future service in the fulfilment cash flows that exceed the carrying amount of the CSM. The staff agreed that IFRS 17 does not allow the CSM to be negative. Applying the multi-currency accounting policy, an entity treats the group of contracts, including the CSM, as a monetary item applying IAS 21 and recognises a loss to limit the carrying amount of CSM to nil. Therefore, the outcome of recognising both an exchange gain and loss is explainable. Moreover, the staff said such loss recognised is not an onerous loss or loss component because IFRS 17 states that a group of contracts becomes onerous only when unfavorable changes in the fulfilment cash flows would cause the CSM to become negative. This is not the case in the illustration where the negative CSM is due to the foreign exchange effect.

Staff recommendation

The staff recommended finalising the agenda decision with some suggested changes.

Committee discussion

The Committee generally agreed with the staff analysis on the respondents’ comments in the agenda paper. Some committee members made comments or requested clarifications on certain areas of the agenda decision. One Committee member said the agenda decision made it clearer that there were two buckets of foreign exchange effects, with the first one resulting from applying IFRS 17 and the second one from applying IAS 21. However, a few Committee members said it is difficult to articulate the distinction between the changes in exchange rates accounted for applying IFRS 17 and those accounted for applying IAS 21. It is also difficult to say which goes to other comprehensive income (OCI) and which goes to profit or loss. The staff responded that the choice to include some insurance finance income or expense in OCI applying IFRS 17:88 is not available to translating the fulfilment cash flows from foreign currency to functional currency because such translation is performed applying IAS 21.

Regarding the requirement of choosing discount rates applying IFRS 17:36, one Committee member said it would be helpful for the agenda decision to clarify whether it is a single rate in the functional currency or separate rates for multi currencies of the cash flows in the contract. The staff said the discount rates have to match with the cash flow characteristics of the fulfillment cash flows. If the cash flows of the multi-currency group of insurance contracts share similar risk, one single rate could be used or an entity could use a blended rate of multiple discount rates for different currencies. On the other hand, one Committee member did not feel comfortable to provide explicit guidance on whether to use a single rate or multiple discount rates in the agenda decision because the standard already gives the principal requirement and judgement would have to be applied.

Various Committee members commented that the agenda decision is clear in distinguishing the exchange effect in applying IFRS 17 and IAS 21 and suggested that some text from the Standard should be added to the agenda decision to make it clearer. The staff agreed to amend the agenda decision.

Other Committee members were concerned that readers may interpret that the development of an accounting policy on measuring multi-currency contracts is a free choice and the determined accounting policy has to be applied to every single contract. The staff replied that the accounting policy is not a free choice but should result in information that is relevant and reliable. Also, the developed accounting policies should be applied consistently to particular groups of contracts sharing similar characteristics but not to all contracts. This has been stated in the agenda decision.

One Committee member commented that the agenda decision does not explain how to present the gain or loss resulting from the application of IFRS 17 and IAS 21 and suggested to add it. The staff said that both IFRS 17 and IAS 21 have no explicit guidance on the presentation of gains and losses, so it would be more harmful than helpful if this was explicitly mentioned in the agenda decision.

Committee decision

The Committee decided, by a unanimous vote, to finalise the agenda decision with the suggested amendments to the text.


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