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 (temporary exemption from applying IFRS 9) approach.

ESMA “appreciates the efforts of the IASB to address any concerns and possible difficulties caused by the different effective dates of IFRS 9 and the new insurance contracts standard”.  It supports both the overlay approach and the temporary exemption from applying IFRS 9 and feels that both approaches should be available on an optional basis.  

Considering the overlay approach, ESMA comments that “the IASB should provide additional guidance on which assets are ‘related to contracts that are in the scope of IFRS 4’ and mandate additional disclosures in this respect”.  ESMA is also of the view that the IASB should limit the amount of presentation options allowed for the overlay approach and should require “the presentation on the face of the statement of profit or loss in accordance with IFRS 9 with a subsequent overlay adjustment from profit or loss to other comprehensive income”. 

ESMA “agrees that eligibility for the temporary exemption from applying IFRS 9 should be based on whether the entity’s predominant activity is the issuance of contracts within the scope of IFRS 4”.  ESMA is of the view that the predominant activity criterion “reflects most appropriately the objective to address the misalignment between the effective dates between IFRS 9 and the new insurance contracts standard” and will provide the most relevant information for the users of the financial statements.

ESMA does not support the assessment of the predominance criterion (for the temporary exemption from IFRS 9) at a level below the reporting entity level and comments that the predominance criterion should be amended “to capture all types of liabilities an insurer is expected to carry for its insurance activities linked to issuance of insurance contracts within the scope of IFRS 4”.  ESMA comments that where the temporary exemption is used, there should be sufficient disclosure about its effects.  

Additionally ESMA “agrees that the temporary exemption from applying IFRS 9 should have an expiry date no later than reporting periods beginning on or after 1 January 2021” and urges the IASB to finalise the new insurance contracts standard in time to meet this deadline.

The full comment letter is available on the ESMA website.