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Insurance and IFRS 9

Date recorded:

There were four papers presented for the April IASB meeting to deliberate on the Exposure Draft “Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts” (the ED).  Paper 14A summarised the feedback received on the ED and the tentative decisions reached as a result of the feedback during the March IASB meeting. At the last meeting the Board tentatively confirmed their decisions expressed in the ED. Paper 14B addressed the Overlay Approach, seeking to reconfirm decisions on areas that did not receive feedback and to clarify the positions that attracted comments from the respondents.

Items the IASB was asked to reconfirm:

Qualifying assets for the overlay approach and related disclosures

The IASB was asked to reconfirm that:

  • The qualifying asset is that asset that is newly designated at FVTPL under IFRS 9, when it would not have been so measured under IAS 39 and it is designated as relating to insurance contracts.
  • Surplus assets and assets required to be maintained for regulatory purposes may also be included. Entities would be required to explain the basis for designation of financial assets and related insurance contracts if these are held/issued by different entities within the group.

The IASB was also asked to reconfirm the decisions relating to subsequent new designations and to redesignations, as well the decisions around the disclosures.

The IASB was also asked to reconfirm the proposals around the initial application, transition to and ceasing to apply the Overlay Approach and applying the overlay adjustment to pre-tax profit or loss.

Proposed amendment from the ED proposals:

Presentation of the Overlay Approach

The IASB was asked to consider amending the ED proposals in paragraph 35C relating to the presentation of the Overlay Approach. The suggestion was to require the entity to present in the income statement a single line relating to the overlay adjustments (including reclassifications from profit and loss to the OCI and vice versa), and to present an overlay adjustment in OCI separately from other components of OCI, as required by IAS 1. The entity would then be required to present in the notes the effect of the Overlay Approach on the individual line items. These proposals are to address the feedback that the ED proposal to leave open a number of presentation alternatives reduced comparability and that the users wanted to see the income statement presentation resulting from applying IFRS 9 with a single line item comprising the effect of the overlay adjustments.

Discussion and tentative decisions

Qualifying financial assets for the overlay approach and related disclosures

Several Board members expressed reservations about the basis for designating financial assets held by one legal entity as relating to contracts within the scope of IFRS 4 that are issued by a different legal entity within the same group. The example noted was when the assets are held by an entity that is not a subsidiary of the entity issuing the contracts. One Board member suggested that the nature of the relationship between the two entities should be disclosed, but another Board member did not support more disclosures, as he felt that it was unnecessary to require disclosure in respect of every judgement area and this would result in boilerplate wording. A further Board member suggested changing the recommendation to “…. issued by a different legal entity within the same reporting entity” and this revised wording was supported by other Board members. 

The Board approved the Staff recommendation (as amended) with twelve of the thirteen board members present voting in favour and one against.

Presentation of the overlay adjustment

There was very limited discussion on this issue.

The Board approved the Staff recommendation with twelve members voting in favour and one against.

Initial application of or ceasing to apply the overlay approach and applying the overlay adjustment to pre-tax profit or loss

A Board member noted that as information that reflects the application of IFRS 9 is presented in P&L, and the overlay adjustment is presented in OCI, this results in the recommendation to apply the overlay adjustment to pre-tax profit or loss more complex. He therefore requested that examples of the presentation of this requirement should be provided.

The Board approved the Staff recommendation with twelve members voting in favour and one against.


Paper 14C looks at the qualifying criteria for applying the temporary exemption from IFRS 9 (the Deferral Approach). The recommendation is consistent with ED proposals (tentatively confirmed at the last IASB meeting), but would provide further quantitative guidance both on the threshold required to qualify and on the method for calculating the numerator and the denominator. To qualify for the exemption the entity would need to have a ratio of insurance liabilities to total liabilities of greater than 90%, or if the ratio is between 80-90%, it would need to prove that it does not have any significant non-insurance related activity. Entities with a ratio of 80% or less would not qualify for the exemption. The predominance ratio is proposed to be calculated as a sum of liabilities on contracts in the scope of IFRS 4 and liabilities related to activities in the scope of IFRS 4 over the total liabilities. When an entity determines that it has liabilities related to activities in the scope of IFRS 4, it would need to disclose what these are. Also, when entity has a ratio between 80-90%, it would need to disclose how it establishes that it does not have other significant non-insurance related activities.

It was proposed that the ratio’s assessment has to be made at the annual reporting date falling between 1 April 2015 and 31 March 2016 (the assessment date). Further, to avoid sensitivity to volatility in the year-end ratio, where there has been such volatility, an entity would need to use instead a 3 year average of the ratio based on annual reporting period amounts (e.g. average of the ratio for 31/12/13, 31/1214 and 31/12/15 year-ends).

Discussion and tentative decisions

Qualifying criteria and the threshold for assessing an entity’s predominant activities

Two Board members stated that they supported the Staff recommendations “through gritted teeth” and another Board member referred to reservations about the inclusion of 80% and 90% “bright lines” but these Board members agreed that they would support the recommendations as the Board was endeavouring to provide practical solutions which were temporary. A Board member questioned whether the 10% range between 80% and 90% provided flexibility that relied on the exercise of judgement, and the Staff confirmed that this was their intention. Another Board member suggested that segmental disclosures might provide evidence that the entity does not have a significant activity that is unrelated to insurance.

Concerns were expressed that the list of examples of liabilities that are connected to insurance activities was very specific and contained too many items, which implied that it was an attempt to capture everything.

The Board approved the Staff recommendation with twelve members voting in favour and one against.

The date of assessment

There was discussion about the situation in which the predominance ratio was met on the assessment date but not in the annual period leading up to the assessment date because market fluctuations have significantly affected the carrying amounts of any liabilities. Concerns were expressed that auditors may require an analysis of the effect of market fluctuations; therefore clarity in the drafting of this requirement would be essential. Another Board member suggested that it might be preferable to require the calculation of the predominance ratio using an average of the relevant carrying amounts for the last three years in all cases, but the Staff explained that they had not proposed this disclosure because information becomes less relevant the further back you go. A Board member suggested that the requirement to consider market fluctuations should be deleted, and this suggestion was supported by another Board member. He considered that this requirement would give rise to a whole host of judgements being required, and felt that the 10% “cushion” was intended to give entities a second chance to meet the predominance ratio requirements. As there was general agreement with his view it was agreed that the words “…. unless (b) applies” should be deleted.

The Board approved the Staff recommendation (as amended) with 12 members voting in favour and one against.

Related disclosures

A Board member questioned the extent of disclosures that would be required about published Standards that had not been applied in respect of the temporary exemption from applying IFRS 9. The Staff confirmed that the intention whether or not to apply IFRS 9 in 2018 should be disclosed, and agreed with a view expressed by a Board member that if the 90% test was met there was no need for any further disclosures to provide details about this test.

The Board approved the Staff recommendation with twelve members voting in favour and one against.


Paper 14D proposes additional disclosures required for entities applying the Deferral Approach.

The proposal was to ask the IASB to add further disclosures to those contained in the ED in paragraph 37A (c-d):

  • To disclose separately closing fair values and fair value movements during the reporting period for:
    • Financial assets with cash flows that are not solely principal and interest and
    • All other financial assets (those that have cash flows that are solely principal and interest);
  • To present sufficiently detailed information to understand the nature and risks of the financial assets;
  • For financial assets that would meet the conditions of cash flows that are solely principal and interest and that are held within a business model to collect contractual cash flows, and which do not have a low credit risk at the end of the reporting period, to disclose both a fair value and the ‘gross carrying amount’ amount under IAS 39 (e.g. for amortised cost assets the carrying amount before adjusting for impairment allowances);
  • To refer to publicly available IFRS 9 information prepared by a subsidiary that is not presented in the consolidated financial statements.

Discussion and tentative decisions

In response to a question from a Board member, the Staff stated that IFRS 7 Financial Instruments: Disclosures had formed the basis of the recommended disclosures, and the intention is require disclosure of how credit risk might affect the gross carrying amount of financial assets. A Board member stated that it would be difficult to disclose credit risk information if the option to defer IFRS 9 was applied, but the disclosure of the fair value of financial assets would give an indication of  potential credit losses.

Another Board member questioned the need to refer to any IFRS 9 information that is not provided in the consolidated financial statements but is publicly available in the financial statements of a subsidiary. He noted that the subsidiary may publish its financial statements months after the consolidated financial statements. The Staff stated that some users can find fair value information easily in the financial statements whereas others are not aware of where this can be found. The Staff also clarified that there would be no requirement to reproduce this information, but to cross-refer to it or to provide a link to where the information is disclosed.

The Board approved the Staff recommendation with eleven members voting in favour and two against.

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