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Amendments to IFRS 17

Date recorded:

Overview of the amendments to IFRS 17 (Agenda Paper 2A)

Background

In October 2018, the Board established criteria to evaluate whether any of the concerns and implementation challenges identified after the publication of IFRS 17 justified amendments to the Standard. The Board has been considering individual issues since then.  

In this agenda paper, the staff considers as a whole the amendments to IFRS 17 that the Board has tentatively decided to propose by evaluating each of the proposed amendments against the criteria the Board set in October 2018 and considering the likely effects of the proposed amendments to IFRS 17.

The staff conclude that none of the amendments either unduly disrupts implementation, or where there could be disruption, that the potential disruption is justified given the stakeholder feedback.

The staff also performed a cost-benefit analysis for all amendments and concluded that for each of the amendments the cost of implementing the amendment is justified in light of the benefits the amendment will bring.

Due process steps and permission for balloting (Agenda Paper 2B)

Background

In this session, the staff:

  • Asked the Board to confirm its tentative decisions from the November 2018 meeting relating to the mandatory effective date of IFRS 17 and the fixed expiry date for the temporary exemption in IFRS 4 Insurance Contracts from applying IFRS 9 Financial Instruments
  • Considered the due process steps undertaken by the Board in completing the narrow-scope project on the amendments to IFRS 17 and asked the Board to confirm that it wishes to proceed with an Exposure Draft (ED) to amend IFRS 17
  • Asked if there are any planned dissents at this stage

The comment period will be discussed at the May 2019 Board Meeting after obtaining permission from the Due Process Oversights Committee for a reduced comment period.

Decision

The Board members confirmed unanimously that its tentative decisions relating to the mandatory effective date still stand and that all due process steps have been undertaken in completing the narrow-scope project on the amendments to IFRS 17. The staff have permission to ballot and none of the Board members intends to dissent at this stage.

Sweep Issues (Agenda Paper 2C)

Background

This agenda paper discusses additional stakeholder concerns relating to IFRS 17 (and IFRS 9) which have arisen in the project on the amendments to IFRS 17.

The first issue in the paper is with regard to the effective date of the proposed amendments to IFRS 17, where the staff recommends that the effective date is aligned with that of IFRS 17.

The other issues in the paper are with regard to:

  • applying the option to disaggregate insurance finance income or expenses between profit or loss and other comprehensive income (OCI) in the general model and using derivatives to mitigate financial risks (Issue 2)
  • applying the option to disaggregate insurance finance income or expenses between profit or loss and OCI in the variable fee approach and applying the risk mitigation option (Issue 3)
  • reconciliations related to the liability for remaining coverage and the liability for incurred claims when cash flows are net settled (Issue 4)
  • the restatement of comparative information when an entity initially applies IFRS 17 and IFRS 9 at the same time (Issue 5)

With regard to Issue 2, stakeholders are concerned with accounting mismatches that could arise between the effect of financial risks in the measurement of insurance contracts applying the general model and derivatives an entity uses to mitigate those risks, which are measured at fair value through profit or loss (FVPL) applying IFRS 9. The staff analyses that the issue only arises when an entity has chosen to apply this option to a portfolio. While this choice has to be made at a portfolio level an entity can minimise the accounting mismatches described by stakeholders by choosing to include all of the effect of changes in financial risks in profit or loss, where the entity will also recognise changes in the fair value of the derivatives. Given the options available to entities and because the Board already considered this matter when developing IFRS 17, the staff recommend not developing a risk mitigation option for insurance contracts accounted for applying the general model for which an entity chooses to apply the OCI option.

With regard to Issue 3, some stakeholders raised similar concerns to those included in Issue 2 above, noting that if an entity chooses to apply the risk mitigation option and the OCI option it will experience the same accounting mismatches. The staff conclude that the analysis provided with respect to Issue 2 above applies to Issue 3 as well. This is because applying the risk mitigation option results in an outcome similar to applying the general model for the risk that the entity mitigates by using derivatives. Thus, entities have options available to avoid accounting mismatches, depending on which information they regard as most important. Therefore, the staff recommend the Board not undertake any further action in this regard.

With regard to Issue 4, some stakeholders noted that specific settlement agreements between reinsurers (the issuers of reinsurance contracts) and insurers (the holders of reinsurance contracts) often include extensive netting arrangements under which all incoming and outgoing payments between the parties are settled net. Similarly, in some relationships between insurers and brokers/managing agents, the broker/agent performs the contractual cash handling and the premiums and claims are settled net with the insurer for all contracts managed by that broker/agent. Those stakeholders observe that for these types of arrangements specific payments such as premiums and claims cannot be assigned to contracts, and hence to groups of contracts, because cash systems are not linked to accounting systems and therefore providing disclosures that distinguish between the liability for incurred claims and the liability for remaining coverage, will require extensive allocations of cash flows. Those stakeholders suggest that the Board should amend the requirements of IFRS 17 to exclude amounts payable and receivable from the scope of IFRS 17 and include them in the scope of IFRS 9. However, the Board has previously decided that measuring premiums receivable and claims payable separately from insurance contracts would result in internal inconsistencies in IFRS 17. The staff think that these views are still valid and hence no amendment to IFRS 17 is justified.

With regard to Issue 5, a stakeholder says that an entity that initially applies IFRS 17 and IFRS 9 at the same time may wish to restate prior periods to reflect the requirements in IFRS 9. However, in this stakeholder’s view, the requirement in IFRS 9:7.2.1 that prohibits entities from applying IFRS 9 to items that have already been derecognised may deter the entity from restating prior periods. The stakeholder recommends the Board amend IFRS 9 to permit entities to apply IFRS 9 to items that have already been derecognised at the date of initial application of IFRS 9. The staff observe that proposing any changes to IFRS 9, particularly with respect to the transition requirements, may risk unintended consequences. Given that insurers can mitigate some of these concerns by applying IFRS 9 for the first time before they apply IFRS 17 for the first time, the staff think that a change to the requirements of IFRS 9 is not required.

Staff recommendation

The staff recommended that the effective date of the proposed amendments should be aligned with the effective date of IFRS 17, so that entities would be required to apply IFRS 17, and any proposed amendments, for annual periods beginning on or after 1 January 2022. Entities would be permitted to apply IFRS 17, together with any proposed amendments, for earlier periods.

The staff recommended to retain the requirements in IFRS 17 (and IFRS 9) with regard to Issues 2 to 5.

Discussion

On Issue 1, one Board member asked if there were any early adopters of IFRS 17 and what the transition requirements were for transition from IFRS 17 (2017) to IFRS 17 as amended. The staff replied that outreach had not produced any evidence of early adopters, so transition requirements are not necessary at this point. Should the IASB learn of any early adopters, the staff would have to think about the transition requirements.

On Issue 2, a Board member said that no further variability should be introduced at this point.

On Issue 5, the Vice-Chair said that this was not a new request and expressed concern that opening up IFRS 9 transition requirements might have many unintended consequences, given the complexity of the Standard. One Board member requested that the Basis for Conclusions of the amendment should include an explanation of the issue and the rationale as to why the Board decided not to proceed with the amendment.

Decision

The Board members voted unanimously in favour of the staff recommendations for all five issues.

Annual Improvements (Agenda Papers 2D & 2E)

Background

In June 2018, the Board tentatively decided to propose minor changes to IFRS 17 for some such instances. At the time, the staff planned to make the changes as part of the Board’s next Annual Improvements to IFRS Standards Cycle. However, because the Board has now also tentatively decided to issue an ED proposing other changes to IFRS 17, the staff plan to include the minor changes in that ED. Since June 2018, through the ongoing implementation activities on IFRS 17, the staff have become aware of a number of other minor changes that would fall within the scope of the annual improvements process.

Some of the topics were discussed at the April 2019 meeting of the IFRS 17 Transition Resource Group (TRG). Agenda Paper 2E summarises the TRG feedback on those issues.

Staff recommendation

Although the changes could be made within the scope of the annual improvement process, the staff recommend to address these changes in the ED of proposed amendments to IFRS 17. Those changes are:

  1. Amendment to IFRS 17:B96(c) to exclude from the adjustment to the contractual service margin (CSM) changes between expected and actual repayment of investment component arising due to changes relating to the time value of money and financial risk
  2. Amendment to IFRS 17:B96(d) when an entity choses to disaggregate changes in the risk adjustment for non-financial risk between those relating to non-financial risk and those relating to financial risk and the effect of the time value of money. While not required, if an entity choses to make such disaggregation, the change in the CSM due to changes in the risk adjustment relating to future service must be calculated using the locked-in discount rates, as specified in IFRS 17:B72(c)
  3. Amendment to clarify that an entity can discontinue the use of the risk mitigation option to a group of insurance contracts only if any of the eligibility criteria for the group in IFRS 17:B116 cease to apply
  4. Amendment to clarify the definition of an investment component to be repayable in all circumstances
  5. Amendment to ensure IFRS 17 applies to investment components that, if separated, would meet the definition of investment contracts with discretionary participation features
  6. Amendments to IFRS 17:48(a) and IFRS 17:50(b) clarifying to adjust the loss component for changes in the risk adjustment for non-financial risk
  7. Amendment to clarify that changes in the measurement of a group of insurance contracts caused by changes in underlying items should, for the purposes of IFRS 17, be treated as changes in investments and hence as changes related to the time value of money or assumptions that relate to financial risk

As regards the annual improvement tentatively agreed by the Board in June 2018, the staff confirmed that no amendments to the proposed changes are necessary. 

Discussion

On Amendments 1 & 2 above, a Board member said that the general model should be applied as it stands and if the relief not to disaggregate is elected, then there will be a measurement difference. That difference is acceptable given what the Board intended when providing the relief.

On Amendment 4, the staff acknowledged that they would have to rethink a disclosure requirement in IFRS 17, given the TRG feedback that insurers would have to distinguish premium refunds from investment components only because of the requirement to disclose investment components separately. The reworded disclosure requirement would be brought back to the May 2019 Board meeting as a sweep issue.

Some Board members pointed out that there were at least two different readings of the definition of investment components amongst TRG members. The amendment is therefore very helpful to ensure the consistent application of the Standard. The Board’s intended outcome would not be changed by the amendment, as the Basis for Conclusions to IFRS 17 already includes the words ‘in all circumstances’. The amendment is merely copying those words into the Standard, to make them a mandatory requirement. A solid definition of an investment component has become even more important when the Board tentatively decided in the January 2019 meeting that part of the CSM would also have to be allocated to investment return services.

On Amendment 7, one Board member asked the staff to confirm that the intention was not to change the scope of underlying items. The staff confirmed that was the case and emphasised that this was true for any kind of insurance contract, regardless of whether they meet the criteria for the VFA approach or not. The Standard is clear that underlying items can be any (sub-)set of assets.

Decision

The Board members voted unanimously in favour of the staff recommendations for all seven amendments.

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