Insurance contracts

Date recorded:

Transition relief proposals in the 2013 Exposure Draft (‘ED’)

All IASB members confirmed the transition relief proposals in the 2013 ED that, on the initial application of the new insurance contracts Standard:

  1. an entity is permitted to newly designate financial assets under the fair value option as measured at fair value through profit or loss to eliminate (or significantly reduce) an accounting mismatch in accordance with IFRS 9.4.1.5;
  2. an entity is required to revoke previous fair value option designations for financial assets if the accounting mismatch that led to the previous designation in accordance with IFRS 9.4.1.5 no longer exists; and
  3. an entity is permitted to newly designate an investment in an equity instrument as measured at fair value through other comprehensive income in accordance with IFRS 9.5.7.5 and is permitted to revoke previous designations.

Additional transition relief to reassess the business model for financial assets

The IASB’s previously stated intention to allow a period of approximately three years between publishing the final insurance contracts Standard and its effective date means that the earliest possible mandatory effective date of the new insurance contracts Standard will be after the mandatory effective date of IFRS 9. As such, many preparers are concerned that they will be required to apply the classification and measurement requirements of IFRS 9 without the opportunity to fully evaluate the implications of the new insurance contracts Standard.

Accordingly, the Staff asked if the IASB would consider providing further transition relief to permit or require an entity to reassess the business model for financial assets at the date of initial application of the new insurance contracts Standard.

Various IASB members agreed with the Staff’s proposal.

A few IASB members questioned the conceptual basis for a reassessment of the business model, as they believed that if the business model has changed then the entity should apply the reclassification criteria in IFRS 9. They believe that as the business model requires an objective assessment of the facts and circumstances, a proposal to reassess the business model upon adoption of a new standard would defeat the very notion of a business model as contemplated in IFRS 9. In response to this, other IASB members noted the importance to differentiate between the ‘reassessment’ approach recommended in the proposal and the ‘reclassification’ criteria set out in IFRS 9 – the latter sets a high hurdle for entities to reclassify financial assets, not least requiring the existence of externally observable evidence to justify this change, which may be lacking for entities transitioning onto the new insurance contracts Standard. These IASB members believe that entities could have reasonable arguments for changing their business model for their financial assets when they apply new insurance contracts Standard and that the IASB should simplify the mechanics to facilitate the accounting to reflect such changes in the business model, to avoid the situation of these entities being ‘locked-in’ to an IFRS 9 classification based on the existing IFRS 4 guidance.

Some IASB members noted that they would be supportive for the Board to consider deferring the effective date of IFRS 9 for entities that issue insurance contracts due to the costs involved and the disruption caused in investors’ communication when they would have to adopt two major standards within a short period of time. Effectively they will have to apply IFRS 9 twice by having to revisit the classification and measurement, as well as impairment judgements made previously. Nevertheless, many IASB members, while noting that it is sub-optimal to have different effective dates for IFRS 9 and the new insurance contracts Standard, objected to deferring the application of IFRS 9 as they have major concerns regarding the identification of the population of entities, and the assets and liabilities of such entities, that will qualify for this exemption. They expressed the opinion that even if such an identification of assets and liabilities could be made, this would lead to an even bigger concern of having similar items being accounted for under two different standards and across entities. Moreover, these IASB members believe that IFRS 9 is a significant improvement to IAS 39, not least in the model for the impairment of asset, and given the inextricably linked nature of the classification and measurement requirements with the impairment requirements, they do not believe that it would be appropriate to permit the deferral of application of IFRS 9 for certain entities. Finally, one IASB member noted that as the new insurance contracts Standard is not yet finalised, deferring the adoption of IFRS 9 for insurance entities would potentially mean exempting entities from applying IFRS 9 for an unknown period of time.

An IASB member observed that in his opinion the final insurance contracts Standard will likely be published before the mandatory effective date of IFRS 9 and this would give to all affected entities the possibility to consider the interaction of the new Standard with IFRS 9 when implementing the latter. Another IASB member noted that the intervening time between the effective date of IFRS 9 and that of the new insurance contracts Standard is expected to be short and so changes in the business model are expected to be insignificant.

When called to vote by the Chairman, 13 out of the 14 IASB members agreed to consider providing further transition relief to permit or require an entity to reassess the business model for financial assets at the date of initial application of the new insurance contracts Standard, based on the conditions for assessing the business model in IFRS 9.4.1.2(a) or 4.1.2A(a) and the facts and circumstances that exist at the date of the first application of the new insurance contracts Standard. They also decided not to consider deferring the mandatory effective date of IFRS 9 for entities that issue insurance contracts. The conditions in IFRS 9.4.1.2(a) or 4.1.2A(a) are respectively those leading to the classification of an asset at amortised cost and fair value through OCI.

Next steps

The IASB will discuss at a future meeting the consequential issues arising from the Board’s decisions, for example, whether the Board should ‘permit’ or ‘require’ the transition relief, and whether a change in the assets’ classification should be applied prospectively or retrospectively. The IASB expects to complete its deliberations in the summer of 2015 and publish the final insurance contracts Standard in 2015.

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