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IFRS 17 Insurance Contracts

Date recorded:

Implications of exploring amendments to IFRS 17 for effective dates (Agenda Paper 2)

At this meeting, the IASB discussed IFRS 17 Insurance Contracts and its effective date and the temporary exemption to IFRS 9 Financial Instruments in IFRS 4 Insurance Contracts.

Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about implementation challenges. At its October 2018 meeting, the Board tentatively decided that when proposing any amendment to IFRS 17, the proposal must meet the specified criteria (the criteria are detailed in Agenda Paper 2C of the October 2018 IASB meeting). It was also noted that the Board would consider at a future meeting whether the concerns indicate a need for standard-setting to amend the requirements of IFRS 17.

Effective date of IFRS 17

Background

An entity is required to apply IFRS 17 for annual periods beginning on or after 1 January 2021. An entity can choose to apply IFRS 17 before that date but only if it also applies IFRS 9 and IFRS 15 Revenue from Contracts with Customers.

Two sets of feedback have been received. Some stakeholders suggested that there is insufficient time to implement IFRS 17 before its effective date and suggested that the date should be postponed by one, two or three years. Another set of stakeholders is expected to be ready to apply the requirements by 2021. According to them a short delay might be helpful, a longer delay will be disruptive and increase the costs.

Staff analysis

The Board deferred the mandatory effective date of IFRS 15, because there were some amendments made to the Standard after its issuance and before its effective date and it was justified due to exceptional nature of circumstances on implementation of IFRS 15. Whereas, in setting the effective date of IFRS 17, the Board has already provided a considerable amount of time (three and half years) to gather data, change IT systems and processes between issuing IFRS 17 and its effective date.

The Board is expected to consider whether to explore amendments to IFRS 17 at its December 2018 meeting. Any uncertainty about those amendments could disrupt the progress of implementing IFRS 17. The staff think that this uncertainty, together with the significant change that IFRS 17 will cause, represent exceptional circumstance. Any amendment proposed might not be finalised for at least one year, considering the need to develop an Exposure Draft, allow an appropriate comment period and redeliberate any proposals. Any amendment should not unduly disrupt implementation already underway or risk undue delay in the effective date of IFRS 17, therefore, the deferral could be limited to one year, so that entities would be required to apply IFRS 17 for annual periods beginning on or after 1 January 2022.

Question for the Board

Given the Board plans to consider whether to explore amendments to IFRS 17 using the specified criteria, the staff ask whether the mandatory effective date of IFRS 17 should be deferred by one year. 

Temporary exemption to IFRS 9

Background

IFRS 4 was amended to allow the overlay approach and to defer the application of IFRS 9 until 2021.

The overlay approach (all issuers of insurance contracts to recognise volatility in OCI rather than profit or loss) addressed concerns about the additional accounting mismatches and volatility in profit or loss that may arise when IFRS 9 is applied in conjunction with IFRS 4. However, the Board observed that this approach would result in additional costs compared to applying IAS 39 Financial Instruments: Recognition and Measurement. Accordingly, the Board introduced a temporary exemption from IFRS 9 for a limited period for insurers whose activities are predominantly connected with insurance. The temporary exemption from IFRS 9 will no longer exist when the insurer first applies IFRS 17. However, the Board decided that, even if IFRS 17 is not effective on 1 January 2021 (as planned), all insurers are required to apply IFRS 9 at that date. 

Some stakeholders are concerned that if the Board were to defer the mandatory effective date of IFRS 17, there will be two sets of major accounting changes in a short period of time resulting in significant cost and effort for preparers of financial statements.

Staff analysis

The staff note that if the Board were to defer the effective date of IFRS 17 by one year and extend the temporary exemption from applying IFRS 9 at the same time, some entities would not apply IFRS 9 up to four years after other entities. That delay might result in a loss of useful information.  However, the staff think that in concluding that a fixed expiry date for the temporary exemption is needed the Board wanted to provide a balance between providing improved information from applying IFRS 9 without undue delay and the desire to provide the cost relief compared to the overlay approach in IFRS 4. If the Board agrees with this view, it could amend the fixed expiry date for the temporary exemption to IFRS 9 in IFRS 4 so that all entities must apply IFRS 9 for annual periods on or after 1 January 2022.

Question for the Board

If the Board were to defer the mandatory effective date of IFRS 17 by one year, should the Board also defer the fixed expiry date for the temporary exemption to IFRS 9 in IFRS 4 by a year?

Board discussion

The Board noted this is an important issue and the sooner it is clarified the better it is. So after taking into consideration of the views of different stakeholders, they agreed with deferring the effective date of IFRS 17 by one year and only one year (and not necessarily agree for the reasons set out in paragraph 11 of the agenda paper). It was noted that deferring the effective date by two or more years would get disruptive and increase costs.

The Board noted that one year provides a good balance to meet the initial expectation of implementation of IFRS 17 and consider the necessary amendments envisaged at this stage. The Board noted that they need to be disciplined and get the process done efficiently. Board members also agreed that insurers could postpone the implementation of IFRS 9 by another year to coincide with the implementation of IFRS 17. Some of the Board members had some concerns about the implementation of IFRS 17 in non-EU countries; the endorsement process; the potential mismatch in IFRS 9 classification, measurement and disclosures; and comparability between banks and insurers. However, it was noted that the deferral by one year is a pragmatic solution to the current uncertain situation and it gives prepares of financial statements four and a half years overall for a successful implementation of IFRS 17.

Board decision

The Board voted unanimously to propose a delay of the mandatory effective date of IFRS 17 by one year to 1 January 2022. The Board also voted 13:1 to propose a parallel shift of the deferral in IFRS 9 mandatory adoption by a year.

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