Financial Guarantees and Credit Insurance

Date recorded:

The purpose of the discussion was to explore the implications of the Board's decision in January, including the key issues raised in comment letters as well as consider re-exposure and a proposed time-table for the rest of the project.

At the January meeting, the Board tentatively decided to permit two approaches:

  • The approach proposed in the Exposure Draft; or
  • Applying IFRS 4, but with a more rigorous liability adequacy test. In particular, in addition to meeting the minimum requirements specified in paragraph 16 of IFRS 4, the net liability recognised should not be less than the amount determined under IAS 37. This additional requirement would not apply to other types of insurance contracts.

The following implications of this decision were discussed:

  • Cash flows from subrogation. The Board questioned why subrogation rights would be considered to be reimbursement rights under IAS 37 and not as contractual rights in terms of the original contract. There was general disagreement with the analysis presented and the Board agreed to consider the other implications before making a final decision.
  • Intra-group guarantees. The Board noted the issue raised had broader implications about measurement of related party transactions that is currently not dealt with under IFRS and which would continue to arise for as long as this lack of measurement guidance exists. After some discussion, the Board noted the difficulties in providing guidance in this area. Some Board members pointed out that IAS 18 would not apply to the contracts (financial guarantees that are in substance, insurance contracts) as that Standard scopes out insurance contracts within the scope of IFRS 4.
  • Whether the option to apply IFRS 4 or IAS 39 should be an accounting policy choice or apply instrument by instrument.
  • Whether the benefits of the proposed approach outweigh the costs.

The Board considered these issues holistically together with proposals to overcome the problems presented in the context of the 'stable platform' and limited changes to insurance accounting that were intended when developing IFRS 4. The Board considered discontinuing with this project but decided to reconsider the issues at the next meeting to allow three Board members that were not present to consider the arguments put forward.

It was suggested that should the Board decide to discontinue with this project, it may be appropriate for Example 9 in Appendix C to IAS 37 to be moved to IFRS 4.

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