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FRC draft comment letter on Insurance Contracts

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13 Sep 2013

The Financial Reporting Council (FRC) has issued a draft comment letter on the IASB's revised Exposure Draft (ED) ED/2013/7 “Insurance Contracts”. The revised ED was published on 20 June 2013 and originally issued in July 2010.

The revised ED retains key features of the insurance contracts accounting model that was exposed by the IASB in 2010.  However, to address constituent’s concerns, a large number of modifications were made to the 2010 ED which the IASB sought feedback on in June 2013. 

The FRC appreciates the work that the IASB and their staff have carried out in addressing constituent’s concerns with the 2010 ED.  However the FRC are of the view that “certain aspects of the new proposals need further work”. 

  • The FRC are concerned that “the introduction of the requirement in the 2013 ED to measure and present insurance liabilities in the Other Comprehensive Income (OCI) will have implications for current business practices in the industry”.  They further comment that this will “create extensive accounting mismatches and likely lead to asset liability measurement mismatch being hardcoded into accounting for insurance contracts”.  This increased complexity, the FRC feel, will reduce understandability of the financial statements for users. 
  • Continuing the theme of accounting mismatch, the FRC comment that this will “incentivise insurers to hold assets that can be held at FV-OCI rather than those compulsorily required to be FV-PL”.  The FRC would like the requirements for classification and measurement of insurance contracts to be consistent with those applied for financial assets.
  • The FRC believe that the mirroring approach proposed in the ED will likely be “complicated to apply and understand in practice”. 
  • The FRC do not agree with the proposal in the ED to accrete interest on the contractual margin at locked-in rates.  Along with conceptual concerns with this proposal they comment that there will be a cost not least in “maintenance and tracking of cohorts for this purpose”.  The FRC would like the IASB to consider the costs and benefits of this proposal. 

Recognising the constituent’s concerns regarding implementation costs and transitioning systems and processes to comply with the new standard, the FRC recommend that there is “sufficient implementation time” after the final standard is published.  The FRC also recommend that early adoption should be permitted where companies feel that they are already ready. 

Please click for the draft comment letter on the FRC’s website.  Comments on the draft comment letter are requested by 10 October 2013.

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