IASB Chair discusses annual cohorts

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28 Apr, 2020

IASB Chair Hans Hoogervorst has issued an article explaining the reasons supporting the IASB’s recent decision to uphold the annual cohort requirement in IFRS 17 for grouping insurance contracts to measure and recognise profit.

In the article, In Brief: IFRS 17 Insurance Contracts — why annual cohorts?, Mr Hoogervorst states:

The Board is particularly concerned that financial reporting presents fairly the financial performance of businesses in each period and how profitability changes over time. As emphasised by the Board’s Conceptual Framework, IFRS Standards must result in useful information about financial performance as well as financial position. Much of existing insurance contract accounting is founded on prudential regulation that has a primary focus on solvency. We believe the dual focus of IFRS Standards on financial performance and financial position greatly enriches the information provided in financial statements. The statements of financial performance often serve as a canary in the coal mine. An erosion of profits may be a foreboding of problems to come.

Mr Hoogervorst goes on to discuss:

  • most financial reporting is applied at the individual contract level;
  • why accounting for individual insurance contracts is not appropriate;
  • annual cohorts essential for prudent planning;
  • objections to annual cohorts raised during the recent consultation, including:
    • Do annual cohorts fail to reflect intergenerational sharing of risk?
    • Do annual cohorts result in arbitrary allocations?
    • Are annual cohorts too costly for contracts with intergenerational sharing of risks?
  • deliberations and redeliberations; and
  • implementing the standard.

The article is available on the IASB's website. For more information on the IASB's decision on annual cohorts, see our meeting minutes from the IASB's February 2020 meeting.

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