Cover note (Agenda Paper 2)

Background

At this meeting, the IASB discussed IFRS 17 Insurance Contracts to determine whether the various concerns regarding the Standard that have been brought to the IASB’s attention require action of the Board.

Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges, among them the issues identified in the EFRAG letter sent to the IASB last month. The Board had previously indicated that it would consider whether additional action is needed to address matters arising during implementation. This meeting was a first step in this assessment process. There were four papers for this meeting. 

Staff provided an update on their activities to support the implementation of IFRS 17 including the most recent TRG meeting. They explained that there are 81 submissions received so far and out of that 32 have been dealt with.  The next TRG meeting might be postponed depending on the volume and the nature of the submissions received.

In addition to the two papers discussed in detail below, the set of papers also included a cover note (Agenda Paper 2), a summary of the TRG meeting held in September (Agenda Paper 2A) and the TRG submission log (Agenda Paper 2B). There was no significant discussion on those papers.

Agenda paper 2C and 2D covered the possibility of exploring changes in IFRS 17 and the concerns and implementation challenges. This meeting was not to decide whether there is a need to amend IFRS 17 or to amend its effective date but instead to set some criteria/framework in evaluating whether an amendment is required. In the future meeting, the concerns and implementation challenges identified will be analysed further to justify an amendment.

Criteria for evaluating possible amendments to IFRS 17 (Agenda Paper 2C)

Background

The paper summarised the criteria the IASB staff have developed for the Board to apply in assessing whether a concern warrants considering an amendment:

• The amendment would not result in significant loss of useful information relative to that which would be provided by IFRS 17 for users of financial statements, i.e. any amendment would avoid
  
  1. reducing the faithful representation of information in the financial statement of entities that issue insurance contracts
  2. causing reduced comparability or internal inconsistency in IFRS Standards
  3. increasing complexity for users of financial statements, thus reducing understandability.
• The amendment would not unduly disrupt implementation processes that are already under way or risk undue delays in the effective date of a Standard that is needed to address many inadequacies in the existing wide range of insurance accounting practices

The staff also noted that even if the Board agrees that any potential amendment to IFRS 17 meets the criteria, it does not mean that all amendments meeting these criteria are justified. There has been some discussion and concerns on the effective date and those will also be assessed for possible amendments.  

Discussion

The Board noted that all the papers reflect positively on the efforts of the TRG and the staff on the support of implementation so far. Board members understand that there are issues in implementation and there is a need for more time for implementation. However, a lot of work went into the Standard, a lot of feedback was gathered at the time of standard-setting and a lot of people are waiting for the Standard to become effective. Changing a Standard at this stage of implementation is very critical. Reopening a final Standard, would impact those who have already begun implementing it. The whole process of amendment is challenging because the IASB needs to consider interaction with IFRS 9 Financial Instruments as well. These criteria set by the staff are very helpful as they set a high hurdle for a change. Amendments might be necessary, if the benefit of changes exceed the costs in order to meet the key objective of the investor—greater comparability, consistency and more transparency. Therefore, the Board should analyse issue by issue against the criteria to achieve the key objective. It is recommended to keep the key/core principles of IFRS 17 that are set. Additionally, any changes/amendments should be narrow in scope and should be resolved efficiently and timely by the Board. It is good to approach the requests by using criteria as this sets the expectations to users of the Standard as well.  Nevertheless, these criteria are necessary but not sufficient.

One of the Board members said that there could be another criterion to operationalise the requests. In their view it could be helpful to understand if an issue is on the list because of substantial new information, unexpected cost or another feature that is new (compared to an issue that the staff were already aware of, have considered and have raised as ongoing concern). The analysis should be looked at as a two-step process with the first step being the identification of a need to amend and the second step assessing whether the issue meets the criteria.

The Chairman concluded the discussion by stating that the Board should strive to make the Standard functional before the next financial crisis. Risking the delay of the Standard or disrupting its implementation is very high. Therefore, changes to IFRS 17 should be fine-tuned only and legitimised by decreasing costs. He also added that the whole package of issues should be looked at.

The Board voted unanimously for the criteria developed by the staff.

Concerns and implementation challenges (Agenda Paper 2D)

Background

This paper is a preliminary assessment by the staff of 25 topics/issues against the criteria proposed in Agenda Paper 2C for each of the below topics.

This paper includes some background information and provides for each identified concern or implementation challenge:

• An overview of the IFRS 17 requirements
• A summary of the Board’s rationale for setting those requirements
• An overview of the concern or implementation challenge expressed
• Staff preliminary thoughts

Discussion

The Board will be asked to consider at a future meeting whether any of the below concerns and implementation challenges indicate a need for standard-setting to amend the requirements of IFRS 17. There were no decisions expected at this meeting. The Board was asked for any comments, questions, and preliminary views/thoughts on the issues.

1. Scope of IFRS 17—Loans and other forms of credit that transfer insurance risk — There was no discussion on this issue.
   

   Staff analysis: For a contract that transfers significant insurance risk in a lending product (where the staff view is that the loan does not meet the definition of an investment component), the staff suggest to amend the scope of IFRS 17 in a way that would meet any of the criteria in paper 2C.

2. Level of aggregation of insurance contracts — Some members agreed with the staff’s preliminary thoughts on this. It might be necessary to have a full analysis to consider the nature of new information (as the topic was previously discussed at the time of the standard-setting) and to analyse the issue more deeply. Members debated how to apply the criteria and discussed the concern about the costs of implementation against the criterion of the usefulness of information of evolution of profitability over time.
   
   
3. Measurement—Acquisition cash flows for renewals outside the contract boundary — There was no discussion on this issue.
   
   
4. Measurement—Use of locked-in discount rates to adjust the contractual service margin — There was no discussion on this issue.
   
   
5. Measurement—Subjectivity | Discount rates and risk adjustment — Some of the members agreed with the staff’s preliminary thoughts about principles and disclosure. One Board member said it would be helpful in the further analysis to amplify some of the thoughts about avoiding to use rules-based approaches. The analysis could be more specific as to what the consequences/implications would be.  Also it would be helpful to have an analysis of the second criterion (comparability and internal consistency) in more detail..
   
   
6. Measurement—Risk adjustment in a group of entities — Some of the members mentioned that the second and third criteria are helpful in deciding in relation to this issue. Members would like to understand the implementation issue and why its clarification may disrupt the implementation for some preparers.
   
   
7. Measurement—Contractual service margin: coverage units in the general model — Board members noted that this was one of the most difficult issues to address. It has previously been considered as an Annual Improvement. There was some disagreement amongst the Board Members. Some thought that separating the analysis into two aspects is critical—variable fee and general model. Several members said that the clarification introduced by the Annual Improvement may disrupt preparation unless it also addresses the general model.  The staff indicated that they have some ideas which they are exploring. Some members welcomed this and were hoping for an efficient solution that would not disrupt implementation, while improving consistency.
   
   
8. Measurement—Contractual service margin: limited applicability of risk mitigation exception — There was no discussion on this issue.
   
   
9. Measurement—Premium allocation approach: premiums received — There was no discussion on this issue.
   
   
10. Measurement—Business combinations: classification of contracts — See number 11 below.
    
    
11. Measurement—Business combinations: contracts acquired during the settlement period — Topics 10 and 11 were discussed together. One Board member made an overall request for more specificity in the staff’s analysis.  It would be helpful to remind users of the usefulness of IFRS 3 information about a significant transaction taking place (business combination) and to provide a deeper analysis of which information about that transaction might be lost if an exception to the general classification requirements were to be reintroduced.
    
    
12. Measurement—Reinsurance contracts held: initial recognition when underlying insurance contracts are onerous — Topics 12–14 were discussed together. One of the Board members mentioned that this is a fundamental issue, as IFRS 17 does not cover policyholder accounting and does not depict the economic difference, and some accounting treatment is prescribed for reinsurance contract. The matching concept here is ideal but is not as easy as with hedge accounting. Hence, it was decided not to address this issue at the time of standard-setting. Another member replied that there is no matching principle in the Conceptual Framework. In assessing the criterion of loss of information, it would be useful to understand what information may be lost to users regarding onerous contracts, change of CSM and separate presentation of reinsurance contacts. Some members welcomed the staff’s preliminary thoughts.
    
    
13. Measurement—Reinsurance contracts held: ineligibility for the variable fee approach —One of the Board members asked for a more granular analysis. Understanding the nature of reinsurance contracts would be useful. One member questioned the mechanics of such reinsurance contracts, which pool of underlying items they would participate in and what is reinsured. If the reinsurance contract is related to underlying variable fee contracts, then the relevance of the approach is an important question, which the analysis does not cover.
    
    
14. Measurement—Reinsurance contracts held: expected cash flows arising from underlying insurance contracts not yet issued —One of the Board members said that for this issue the question is not of cost but of relevance, so the staff need to explain the analysis so the Board members can consider.
    
    
15. Presentation in the statement of financial position—Separate presentation of groups of assets and groups of liabilities — This issue was raised previously at the time of standard-setting. One member asked for targeted outreach, while others questioned the results of the previous field testing.  However, one of the Board members said that the staff’s preliminary analysis seems to be more open to offsetting here than the Board has been in the approach to offsetting in other Standards in the past. If it relates to a particular product, the Board needs more detail as otherwise, it seems to be a potential fundamental inconsistency across Standards on an area that has been examined more generally twice before.
    
    
16. Presentation in the statement of financial position—Premiums receivable — There was no discussion on this issue.
    
    
17. Presentation in the statement(s) of financial performance—OCI option for insurance finance income or expenses — One of the Board members mentioned that they hear about this issue consistently as a feedback from users who do not like this option. The Boards appreciates that addressing the issue would be disruptive.
    
    
18. Defined terms—Insurance contract with direct participation features — There was no discussion on this issue.
    
    
19. Interim financial statements—Treatment of accounting estimates — There was no discussion on this issue.
    
    
20. Effective date—Date of initial application of IFRS 17 — One of the Board members said that this is a complex issue because there are four sets of stakeholders involved: some users want to use the Standard right away, some preparers do not want a delay, some prepares require more time and some preparers and maybe other groups who want to change the Standard. The Board should think about this issue in detail and keep track of the different reasons for a deferral.
    
    
21. Effective date—Comparative information — One Board member said that this needs to be taken off the list as it can be combined with issue 20.  Another Board member suggested to get some feedback on the experience from IFRS 9 and IFRS 15 Revenue from Contracts with Customers that might be helpful in the analysis. One Board member said that there will be loss of information and the issue should be carefully considered to avoid any controversy. Another Board member said that a two-tier model (listed and unlisted companies) might help/ would take little pressure of the market. Others suggested that having different effective dates for the parent and its subsidiaries in the group creates ongoing complexities, and the experience of IFRS 1 First-time adoption of International Financial Reporting Standards is relevant.
    
    
22. Effective date—Temporary exemption from applying IFRS 9 — One member suggested that the loss of information caused by extending the deadline for initial application of IFRS 9 would still be there by extending the deadline for IFRS 17.
    
    
23. Transition—Optionality — There was no discussion on this issue.
    
    
24. Transition—Modified retrospective approach: further modifications — There was no discussion on this issue.
    
    
25. Transition—Fair value approach: OCI on related financial assets — There was no discussion on this issue.
    

All of the 25 issues will again be analysed by the staff and will be brought to the Board in the next months for discussion. It is too early to say whether these discussions will result in any proposals to change the Standard. If any changes were to be proposed, the Board will follow its normal due process for standard-setting, which includes a public consultation.