Insurance contracts

Date recorded:

Classification and measurement of financial assets on transition (paper 2A)

Agenda paper summary

The Board was provided with an analysis of the choices available to entities initially applying IFRS 9 (with or without the overlay approach) before adopting the new insurance standard.

The recommendation on transition is to permit entities to reassess the business model for financial assets designated as related to contracts within the scope of the new IFRS 4. (The scope of financial assets qualifying for reassessment of the business model should be consistent with the designation approach under the Overlay approach tentatively agreed by the IASB in its September meeting)—see IASB Staff Agenda paper 14B Insurance Contracts: IFRS 9 and IFRS 4: Different effective dates of IFRS 9 and the new insurance contracts Standard: The Overlay Approach paragraphs 10-16.

The proposals would apply to assets held to fund insurance contracts based on expected level of claims and expenses and surplus assets held in case of unexpected increases in insurance liabilities. However they would not apply to other financial assets held by an entity for a purpose clearly other than issuing insurance contracts. Similarly, on transition the entities would be permitted to designate and de-designate equity investments between FVO and equity presentation elections.

The staff paper also sets out the extensive disclosure proposals, both qualitative, explaining the application of transitional relief taken by entities and the reasons for the reassessments and re-designations; and quantitative, showing granular amounts by line items affected. 

IASB discussion and decisions

There was some discussion about whether the reassessment was similar to a change of business model. The Board members asked the Staff to clarify in drafting that the re-assessment of the business model does not imply that the model itself has changed (with meaning specified in IFRS 9), but rather in light of the new Standard and new circumstances an entity would have arrived at different classifications/designations. It was also highlighted that the reassessment or re-designations are optional. These proposals were approved unanimously.

The Board also approved unanimously the Staff proposal that the reassessment would be based on facts and circumstances existing on initial application of the new insurance Standard (that is the beginning of the latest period presented) with new classifications /designations applying retrospectively. Any resulting changes would adjust opening retained earnings and accumulated OCI.

Some Board members wanted to emphasise the need to explain the reasons for re- assessments and re-designations. Others argued that this information implied some necessary conditions, when these conditions were not explicitly stated. After a brief discussion the Board approved the staff recommendation.

Restatement of comparative information on initial application of the new insurance contracts Standard (paper 2B)

Agenda paper summary

The completed version of IFRS 9 does not require restatement of comparative information for the initial application of the classification and measurement requirements, but permits it, only if it is possible to do so without the use of hindsight. On the contrary, the revised Insurance ED proposed to require retrospective restatement of comparative information about insurance contracts, permitting a simplified approach, where full application was impractical. This intention was tentatively confirmed in the October 2014 meeting with proposals to further simplify the ‘simplified approach’ and to allow a fair value approach if the simplified approach would also be impracticable.

IASB discussion and decisions

After a brief discussion, the Board members agreed to reconfirm once more the intention to require for all entities the restatement of comparative information about insurance contracts.

However, the Board tentatively decided for entities already applying IFRS 9 on initial application of the new insurance Standard to permit (but not require) the restatement of comparatives for financial assets, only if it is possible without the use of hindsight, only when those entities use any transitional reliefs under the insurance contracts Standard:

  1. to reassess its business model for managing financial assets
  2. to re-designate financial assets under FVO or OCI presentation election for equity investments

The “mirroring approach” (paper 2C)

Agenda paper summary

The 2013 revised Insurance ED proposed a “mirroring approach” to the measurement and presentation of contracts that meet specified criteria.  In this session the staff asked the IASB to decide whether that approach should be retained in the proposed insurance contracts Standard. 

The staff paper explains that, although there was sympathy for the intention of removing mismatches, the specific proposal was widely criticised.  It was viewed as being too complex and potentially inconsistent for some participating contracts.  The variable fee approach was developed in response to these concerns. 

The staff recommendation was that the mirroring approach should not be permitted or required in the proposed insurance contracts Standard.  They note, however, that some mutual insurers might be concerned about that recommendation.

IASB discussion and decisions

There was a unanimous agreement to abandon the mirroring approach, for the reasons set out in the paper.

The discussion considered entities with potentially no equity (including mutual entities) and the possible presentation of financial statements available to them but the Board members felt this was outside the scope of the insurance project.

Presentation and disclosure (paper 2D)

Agenda paper summary

The paper summarised the impacts on disclosure of all the redeliberations and developments since publishing the 2013 revised Insurance ED. In particular it considered the IASB decision to introduce the ‘variable fee approach’ for contracts with direct participating features, the modification of the presentation of interest expense in OCI and the impact of the publication of the revenue standard, IFRS 15.

IASB discussion and decisions

There was a lively discussion on the various disclosure requirements, their usefulness to users, the comparability across and within entities and the difficulty of producing them.

The Staff clarified that an entity would need to keep track of and disclose the movement in the financial assets designated as related to insurance contracts at the date of transition when that entity had made the election, for those insurance contracts, to disaggregate between profit or loss and OCI their interest expense and it also used the simplified approach at transition setting to zero the accumulated balance of OCI for those insurance contracts.

The Board agreed to confirm the 2013 revised Insurance ED proposals for presentation of insurance contract line items in the financial statements.

The Board members considered the need to present separately insurance contracts measured using different methods.  Some felt that the measurement simply reflects different features of the contracts and therefore presenting them in one line would still give comparable information. Others argued that the contracts profitability may ‘unfold’ differently over time. Overall, the Board members felt that the reference to the IAS 1 requirement to present separately items of different nature or with different features should be emphasised more strongly.

There was a lively debate on the onerousness and the usefulness of the Staff proposed need to provide two CSM roll-forward calculations with and without the guarantee for entities using the variable approach. In the end the Staff proposed a re-worded disclosure which was agreed. The re-worded requirement would read as follows:

If entity uses the variable approach and recognises changes in the guarantee in profit or loss, it should be required to disclose the amount of guarantee recognised in profit or loss for the period

The Board re-confirmed 2013 revised Insurance ED proposals and all subsequent tentative decisions, subject to changes made at this meeting.

The Board agreed to delete the reconciliation of insurance revenue to premium received in the period because there is already information about premiums written and premiums collected in the period (but not premiums due).

In discussing the interest expense analysis some members questioned whether there is a default view (current rate versus locked-in). The Staff reconfirmed that there was no default position. Others questioned whether for entities choosing to present all changes in profit or loss there should be some way to distinguish investing from underwriting activities. However, the proposal was felt unnecessary as the OCI presentation was never really achieving that split in the first place. 

To recap, the disclosures required for the time value of money would be:

  1. If an entity chooses to disaggregate interest expense into an amount presented in profit or loss and an amount presented in OCI, it should be required to disclose an explanation of the method used to calculate the cost information presented in profit or loss. Additionally, entities using the simplified approach at transition to measure the accumulated balance of OCI at zero, should be required:
    1. to designate financial assets as relating to contracts within the scope of the new insurance contracts Standard at the date of transition;
    2. to disclose at the date of transition and in each subsequent reporting period, a reconciliation from the opening to closing balance of the accumulated balance of OCI for those financial assets.
  2. Entities should be required to disclose:
    1. changes in the fulfilment cash flows that adjust the contractual service margin;
    2. an explanation of when the remaining contractual service margin is expected to be recognised in profit or loss either on a quantitative basis using the appropriate time bands or by using qualitative information; and
    3. the amounts in the financial statements determined at transition using simplified approaches, both on transition and in subsequent periods.
    4. any practical expedients that an entity used.
  3. The entity would not be required to:
    1. reconcile revenue recognised in profit or loss in the period to premiums received in the period (paragraph 79 of the 2013 revised Insurance ED); and
    2. disclose an analysis of the total interest expense between profit or loss and OCI (tentative decision from March 2015).

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