The amendments were published by the International Accounting Standards Board (IASB) in December 2015 and propose to amend IFRS 4 Insurance Contracts to address the concerns expressed about the different effective dates of IFRS 9 Financial Instruments and the new insurance contracts standard.  The amendments are intended to provide two options for entities that issue insurance contracts within the scope of IFRS 4:

• an option that would permit entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach; and
• an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.

EFRAG welcomes the IASB proposals. EFRAG believes that the temporary exemption from applying IFRS 9 addresses all the concerns relating to the misalignment of IFRS 9 and the new insurance contracts standard, while the overlay approach would only address the accounting mismatches. Nevertheless, EFRAG supports both approaches as complementary solutions.

While EFRAG believes the temporary exemption to address all concerns, EFRAG is also convinced that the exemption should be available to as many entities that are significantly impacted by the interaction between IFRS 9 and IFRS 4 in order to avoid an uneven playing field in the insurance sector.  EFRAG also believes that the temporary exemption from applying IFRS 9 should not be extended to banking activities that are material at the reporting entity level.  In relation to the temporary exemption EFRAG proposes that:

• the issuance of a significant amount of insurance contracts within the scope of IFRS 4 be a necessary condition to apply the temporary exemption from applying IFRS 9;
• entities should be allowed to apply either a widened predominant activity criterion or a regulated entity criterion to identify whether the temporary exemption from applying IFRS 9 can be applied; and
• the temporary exemption from applying IFRS 9 can be applied either at or below reporting entity level.

Finally, EFRAG agrees with the expiry date set for the temporary exemption from applying IFRS 9.

The press release and full comment letter are available on the EFRAG website.