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.

The FRC “appreciates the IASB’s work in addressing concerns raised by the insurance industry about the misalignment of the effective dates of IFRS 9 and the new insurance contracts standard” and “commends” the IASB in proposing the solutions it has.  However, the FRC believes that “further amendments are required to ensure that the temporary exemption from the application of IFRS 9 is a pragmatic and effective solution”.

The FRC comments:

In summary, we consider the ED requirements – the application of the temporary exemption at the reporting entity level only, together with the eligibility condition – create too blunt an instrument to achieve the intended objective of the deferral approach.

In its comment letter the FRC recommends that the IASB amends the predominance assessment for the temporary exemption such that:

• The predominant activity is primarily determined by reference to a liability ratio test with some adjustments required to “ensure the test is effective”.
• Whilst the liability ratio should be the primary test for the application of the exemption its conclusion should be rebuttable, if there are clear contrary indicators providing strong evidence that the predominant activity is that of an insurer and vice versa.
• The application of the predominance criteria should be permitted at the reporting entity level or below at sub-group levels.

Additionally the FRC “fully support the proposal that IFRS 9 be mandatory for all companies for years commencing on or after 1 January 2021” and would not support any extension of the deferral period. 

Further comments are contained in the full comment letter which is available on the FRC website.