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Comment-letter feedback on the IASB’s proposal related to the different effective dates of IFRS 9 and the forthcoming insurance contracts standard

  • IASB (International Accounting Standards Board) Image

Feb 08, 2016

The comment deadline for the IASB’s exposure draft ED/2015/11, “Applying IFRS 9 'Financial Instruments' With IFRS 4 ‘Insurance Contracts,’” has now passed. (Comments were due by February 8.)

ED/2015/11 proposed two options for entities that issue insurance contracts within the scope of IFRS 4:

  • Entities would be permitted “to re­clas­sify, from profit or loss to other com­pre­hen­sive income, some of the income or expenses arising from des­ig­nated financial assets” (i.e., the “overlay approach”).
  • Entities “whose pre­dom­i­nant activity is issuing contracts within the scope of IFRS 4” would be able to employ “an optional temporary exemption from applying IFRS 9” (i.e., the “deferral approach”).

The comment letters on the ED seem to focus on two questions:

  1. Is one of the two ap­proaches prefer­able, and can either one be dropped al­to­gether?
  2. How can pre­dom­i­nance best be de­ter­mined under the deferral approach, and what is the ap­pro­pri­ate level for assessing pre­dom­i­nance?

Regarding the first question, most re­spon­dents believe that both the overlay approach and the deferral approach are needed because they address different issues depending on the type of business ac­tiv­i­ties and group struc­tures. For instance, entities in the insurance industry are requesting that IFRS 9 be deferred until the insurance standard is completed, primarily citing cost reasons. However, some user groups are asking for the overlay approach only, and some are even arguing that it would be best to do nothing, believing that com­pa­ra­bil­ity would be hindered if multiple options exist.

Some respondents had suggestions for refining the deferral approach. While most re­spon­dents agree that assessing pre­dom­i­nance is the right approach, some believe that the IASB's proposal for assessing pre­dom­i­nance at the “reporting entity level" is confusing. Most re­spon­dents seem to believe that the IASB sees the group level as the reporting entity level. However, others believe that the reporting entity level could also constitute lower levels than the group level. Implications of the two possible assessments may include:

  • As­sess­ment is at the group level — Pure insurance companies that are sub­sidiaries of con­glom­er­ates would not have the option of deferral, while companies that are not sub­sidiaries of con­glom­er­ates would have the option.
  • As­sess­ment is at a lower level than the group level — In this assessment, there is the question of roll-up. That is, either (1) groups would need to con­sol­i­date IFRS 9 and IAS 39 numbers or (2) qual­i­fy­ing sub­sidiaries would need to keep two sets of books: an IAS 39 one for reporting to their users and an IFRS 9 one for reporting within the group.

The IASB plans to begin rede­lib­er­a­ting the ED in the second quarter of 2016. Final amend­ments are expected to be published in the third quarter of 2016.

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