EFRAG expresses concerns on insurance contracts standard

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

18 Nov, 2013

The European Financial Reporting Advisory Group (EFRAG) has issued their final 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. EFRAG “appreciates the effort” that the International Accounting Standard Board (IASB) has taken to address the concerns with the 2010 ED but comment that they still have some “remaining concerns” with the revised ED.

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.   

EFRAG provide the following comments in their final comment letter, many of which are shared by the Financial Reporting Council (FRC), The Association of British Insurers (ABI), and Deloitte:

  • EFRAG does not support the mandatory use of other comprehensive income (OCI) to measure and present insurance liabilities.  Instead EFRAG recommends that the IASB “identify a third ‘liability-driven’ long-term investment business model” which would provide entities with an accounting policy choice “whether to report the impact of changes in the discount rate of the insurance liabilities in the statement of profit or loss or the statement of other comprehensive income”.  EFRAG comment that this flexibility will help to eliminate accounting mismatches “to an acceptable extent”.
  • EFRAG does not support the ‘mirroring approach’ in the revised ED.  Among other comments, EFRAG note that this approach “increases the complexity” and will “make financial statements difficult to understand and would impair comparability of contracts with similar economic features”.  Instead, EFRAG recommends that an insurance industry alternative approach would address some of their concerns with the mirroring approach.  EFRAG highlight that any new approach would “need sufficient time for testing”.
  • EFRAG does not support the IASB presentation proposals when the simplified approach is not used.  For companies not applying the simplified approach, “EFRAG is supportive of a summarised margin presentation with volume information disclosed in the notes to the financial statements”.

Against these concerns, EFRAG does express support for “the IASB’s proposal to adjust the contractual service margin” and comment that they believe the contractual service margin “shall represent the unearned profit in an insurance contract”.  EFRAG also agrees with “the proposed modified retrospective approach” for transition.    

EFRAG “continues to request the alignment of the effective dates of IFRS 9 and the new standard on insurance contracts, with early adoption possibilities for both standards, and full redesignation and reclassification of the investment portfolios should this alignment be rejected”.  They also recommend a three year implementation period “from the date of publication of the new insurance contracts standard”.

Please click for the press release and final response, including full responses to the questions raised in the ED, on EFRAG’s website.

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