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ESMA supports endorsing IFRS 17 in its current form

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29 Jan 2021

The European Securities and Markets Authority (ESMA) has commented on the European Financial Reporting Advisory Group's (EFRAG) draft endorsement advice on IFRS 17 'Insurance Contracts'.

As reported earlier, the Board of the European Financial Reporting Advisory Group (EFRAG) published positive a draft endorsement advice on IFRS 17, however, it was noted that the EFRAG Board achieved consensus on all issues with the exception of annual cohorts, with nine Board members voting in favour of the cohorts meeting the endorsement criteria and seven members disagreeing.

ESMA's comment letter notes that IFRS 17 has the benefit of providing transparency on insurance accounting aspects that have for a long time remained unregulated under IFRS due to the continued application of IFRS 4, which was initially intended as a temporary solution and which has de facto prevented the application of an accounting model that could provide clear principles on how to recognise, measure and present amounts relating to insurance contracts on the basis of commonly understood accounting principles.

On the annual cohort question, ESMA highlights that a key role in promoting greater transparency and consistency in accounting for insurance contracts in accordance with IFRS 17 is played by the principles for the aggregation of contracts that form an integral part of the new measurement model and that include the annual cohort requirement. ESMA notes that "IFRS 17 is built around a set of checks and balances which have been carefully developed" and ESMA regrets that EFRAG has decided to assess selected requirements in isolation from others. ESMA is of the view that the alternatives proposed cannot be considered to be more effective and efficient than the current annual cohort requirement.

ESMA therefore supports the endorsement of IFRS 17 in its current form. Should further evidence emerge that the effectiveness and efficiency of the requirements can be improved, ESMA believes the IASB should consider these as part of the post-implementation review of IFRS 17.

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