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Amendments to IFRS 17

Date recorded:

Background

In October 2018, the Board considered concerns and implementation challenges identified by stakeholders during their IFRS 17 implementation processes and commenced a process of evaluating the need for making possible amendments to the Standard. In this session, the Board individually evaluates the remaining topics that have been raised by stakeholders before it will consider the package of amendments as a whole in its April 2019 meeting.

Board discussion

The staff noted that after this session, all 25 identified issues will have been discussed by the Board and that the staff could then proceed to drafting the Exposure Draft. For the Exposure Draft, the staff will seek approval from the Due Process Oversights Committee to include a comment period of less than 120 days.

Level of Aggregation (Agenda Paper 2A–C)

Background

IFRS 17 requires an entity to recognise and measure groups of insurance contracts. Groups are determined by:

  • (a) Identifying portfolios of insurance contracts. A portfolio comprises contracts subject to similar risks and managed together
  • (b) Dividing a portfolio into a minimum of three groups (profitability buckets):
    • (i) A group of contracts that are onerous at initial recognition, if any
    • (ii) A group of contracts that at initial recognition have no significant possibility of becoming onerous subsequently, if any
    • (iii) A group of remaining contracts in the portfolio
  • (c) Dividing the profitability buckets into groups of contracts not issued more than one year apart (annual cohorts)

Some stakeholders have expressed concerns with the level of aggregation requirements in IFRS 17 (mainly relating to the annual cohort requirement). Some stakeholders think:

  • (a) The requirements will not provide users of financial statements with useful information
  • (b) Implementing the requirements is a major challenge and the benefits do not outweigh the costs
  • (c) The requirements are unnecessary because an entity can achieve the same outcome without applying those requirements

In the agenda paper, the staff analyses the stakeholder concerns by going through the following steps:

  • (a) Do the requirements in IFRS 17 provide useful information?
  • (b) Do the benefits outweigh the costs of implementing the requirements?
  • (c) Are the requirements necessary?

The staff observe that providing information about timely recognition of losses on onerous contracts, profits on profitable contracts and trends in an entity’s profitability from contracts over time is a key benefit of IFRS 17. The requirements on the level of aggregation in IFRS 17 are essential to providing that information. The staff accept that implementing IFRS 17 involves significant costs but observe that the IFRS 17 requirements on the level of aggregation already include simplifications to reduce their operational burden. The staff think that all of the suggested changes to the requirements from stakeholders would result in an unacceptable loss of useful information, particularly in relation to information about trends in an entity’s profitability over time.

Staff recommendation

The staff recommend the Board retain the IFRS 17 requirements on the level of aggregation unchanged.

Board discussion

The Board members agreed with the staff recommendation, acknowledging that the cost of implementing the requirements of the Standard is very high, but also pointing out that the benefits are higher. It was highlighted that a majority of the benefits of IFRS 17 are based on the level of aggregation requirements. Abandoning those requirements would fundamentally change IFRS 17. It was also mentioned that the pooling of risks would be common in other industries as well, for example in the banking industry. In terms of annual cohorts, it should be considered that IFRS 17:BC138 allows a different method, as long as the outcome is the same. The Vice Chair noted that the staff papers show what that outcome is meant to be.  

Agenda Paper 2A illustrated an example where policyholders share in the returns of underlying items in a way that no individual contract would become onerous until all the contracts in the portfolio become onerous. However, the fact that the underlying items are shared across all policyholders does not mean that the entity receives an equal (average) profit from all contracts.

The staff emphasised that annual cohorts are a practical expedient because the concept involves the loss of some information about timely recognition of losses and emergence of profit on contracts within an annual group. The Board attempted to develop a principle-based approach, as described in Agenda Papers 2B & 2C but in the course of the standard development concluded that it would have been too onerous to implement.

The Chair warned that profits could be averaged between contracts without the level of aggregation requirements, which would be a significant loss of useful information and would enable entities to obscure risks that are inherent in the business model. This would contribute to financial stability and would indicate losses early. Investors will appreciate the better information provided by IFRS 17 and in the long term cost of capital would be reduced.

The Vice Chair welcomed the summary of historical decisions in the agenda papers as well as the examples. The history helps to remind the Board why they took the decision to include the level of aggregation requirements, while the example helps to create a common understanding of what the issue is.

One Board member struggled with the ‘artificial’ cash flows in the example in the agenda paper, which were created to transfer cash flows from one group to another. The staff clarified that they do not agree that those cash flows are artificial as they are based on the fact that the cash flows for one group of insurance contracts are paid to the policyholders of another group. In the example, the specific terms of the contracts would allow this.

Board decision

The Board voted unanimously for the staff recommendation to leave the level of aggregation requirements of IFRS 17 unchanged.

Credit cards that provide insurance coverage (Agenda Paper 2D)

Background

IFRS 17 applies to all insurance contracts as defined in IFRS 17, regardless of the type of entity issuing the contracts, with some specific exceptions. The definition of an insurance contract in IFRS 17 is the same as the definition of an insurance contract in IFRS 4 Insurance Contracts, with minor clarifications.

The Board decided that IFRS 17 should apply to all entities issuing insurance contracts—as opposed to insurers only.

Some stakeholders are concerned that IFRS 17 requires an entity to account for some credit card contracts as insurance contracts. Similar to the concerns and implementation challenges expressed by stakeholders for loans that transfer significant insurance risk, those stakeholders observed that the requirements in IFRS 17 for the separation of non-insurance components (such as a loan or a loan commitment in a credit card) differ from the requirements in IFRS 4, which permit entities to separate a loan component from an insurance contract and apply IFRS 9 Financial Instruments to the loan component. Those stakeholders are therefore concerned that entities that currently account for a loan or a loan commitment in a credit card applying IFRS 9 would need to change the accounting for those contracts when IFRS 17 is effective, shortly after having incurred costs to develop a new credit impairment model to comply with IFRS 9.

The staff have analysed the following approaches to resolve the issue:

  • (a) Approach 1—Amending an existing scope exclusion in IFRS 17
  • (b) Approach 2—Developing a specific scope exclusion for credit card contracts

Staff recommendation

The staff recommend Approach 2, i.e. amend IFRS 17 to exclude from the scope of the Standard credit card contracts that provide insurance coverage for which the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer.

Board discussion

The Board members supported the staff recommendation, pointing out that although it feels wrong to scope out a product with insurance risk, IFRS 9 is robust enough that no significant information would be lost.

With regards to travel insurance, the staff clarified that if the issuing bank acts as an agent for an insurance company, then the travel insurance would still be in the scope of IFRS 17, even if the insurer has no ability to assess the risks of the credit card holder. However, if the bank acts as a principal, the travel insurance would be scoped out.

Board decision

The Board took the unanimous decision to support the staff recommendation to amend IFRS 17 to exclude from the scope of the Standard credit card contracts that provide insurance coverage for which the entity does not reflect an assessment of the insurance risk associated with an individual customer in setting the price of the contract with that customer.

Transition Requirements—Risk mitigation options (Agenda Paper 2E)

Background

IFRS 17 applies to insurance contracts and IFRS 9 applies to an entity’s financial assets and derivatives. Accounting mismatches can arise because those Standards measure insurance contracts differently from financial assets and derivatives. In particular, the measurement of insurance contracts applying the variable fee approach results in the effects of changes in financial assumptions adjusting the contractual service margin (CSM) of the group of insurance contracts, while fair value changes of financial assets and derivatives are recognised in profit or loss or other comprehensive income (OCI).

Entities may purchase derivatives to mitigate financial risks. An accounting mismatch arises because:

The change in the fair value of the derivative would be recognised in profit or loss applying IFRS 9, but the change in the insurance contract, the risk of which was mitigated by the derivative, would adjust the CSM applying IFRS 17, unless the contracts were onerous.

Hence, IFRS 17 includes an option for an entity in specified circumstances to recognise the effect of some changes in financial risk in the insurance contracts in profit or loss, instead of adjusting the CSM (risk mitigation option).

In its February 2019 meeting, the Board tentatively decided to retain the prohibition in IFRS 17 of retrospective application of the risk mitigation option. The Board asked the staff to explore alternative proposals that would address stakeholders’ concerns about the results of not applying the option retrospectively.

The staff considered two possible ways, other than retrospective application of the risk mitigation option, to address stakeholders’ concerns:

  • (a) Permitting entities to apply a prospective application of the risk mitigation option from the IFRS 17 transition date
  • (b) Permitting entities that have used derivatives or reinsurance contracts held to mitigate financial risk arising from insurance contracts with direct participating features before the transition date to apply the fair value approach to transition, even if they are able to apply IFRS 17 retrospectively

Staff recommendation

The staff recommend the Board should amend the requirements of IFRS 17 to permit entities to apply the risk mitigation option prospectively from the transition date.

Board decision

The Board decided unanimously to follow the staff recommendation. There was no significant discussion on this agenda paper.

Transition requirements—Loans that transfer significant insurance risk (Agenda Paper 2F)

Background

In its February 2019 meeting, the Board tentatively decided to amend the scope of IFRS 17 and IFRS 9 to permit an entity to apply either IFRS 17 or IFRS 9 to insurance contracts that provide insurance coverage only for the settlement of the policyholder’s obligation created by the contract.

If an entity elects to apply IFRS 17 to a portfolio of such loans, it will apply IFRS 17 to groups of insurance contracts within the portfolio of loans. Accordingly, the entity would apply the transition requirements in Appendix C of IFRS 17 to each group of insurance contracts. The staff think that the transition requirements in IFRS 17 are sufficient for an entity to apply the proposed amendments.

If an entity elects to apply IFRS 9 to a portfolio of loans that transfer significant insurance risk, then the transition requirements depend on whether:

  • (a) The entity applies IFRS 17 and IFRS 9 for the first time together. This will be the case if the entity was eligible for the IFRS 9 temporary exemption and elected to apply it.
  • (b) The entity is already applying IFRS 9 when applying IFRS 17 for the first time. This will be the case if the entity did not meet the criteria for the IFRS 9 temporary exemption or elected not to apply it.

In the first case, the entity applies the transition requirements in section 7.2 of IFRS 9. The staff are not aware that loans that transfer significant insurance risk would require any additional transition relief.

In the second case, the transition requirements in IFRS 9 would not be applicable to the loans as the entity has already transitioned to IFRS 9. Consequently, in the absence of specific transition provisions, an entity would apply the new accounting policy––i.e. would apply IFRS 9––to loans that transfer significant insurance risk retrospectively, without the possibility of applying any transition relief. However, the staff note that when the Board developed the transition requirements in IFRS 9, it provided specific requirements to address scenarios when it anticipated that it would be impracticable to apply particular requirements retrospectively. Accordingly, the staff think that an entity should be able to apply the transition requirements in IFRS 9 in this case.

Staff recommendation

The staff recommend the Board maintain the transition requirements in IFRS 17 without modification for loans that transfer significant insurance risk and for which the entity elects to apply IFRS 17.

Additionally, the staff think that the existing transition requirements in IFRS 9 should apply to any loans that transfer significant insurance risk and for which the entity elects to apply IFRS 9 (if it applies IFRS 9 and IFRS 17 together for the first time). The Board should thus not consider any amendment in this respect.

However, the staff recommend the Board amend IFRS 9 to provide transition relief for an entity that elects to apply the requirements in IFRS 9 to a portfolio of loans that transfer significant insurance risk, and has already applied IFRS 9 before it initially applies IFRS 17.

Board decision

The Board decided unanimously to follow the staff recommendation. There was no significant discussion on this agenda paper.

Amendments to disclosure requirements resulting from the Board’s tentative decisions to date (Agenda Papers 2G & 2H)

Background

In this session, the Board will discusses whether the tentative decisions of the Board for already proposed amendments to IFRS 17 result in the need to amend the disclosure requirements in IFRS 17.

The staff analysed the need and makes the following recommendations.

Staff recommendations

The staff recommend the Board amend the disclosure requirements in IFRS 17 to reflect the proposed amendments related to:

  • (a) The CSM recognised in profit or loss on the basis of coverage units determined by considering both insurance coverage and investment-related services or investment return services, if any, by requiring:
    • (i) Quantitative disclosure, in appropriate time bands, of the expected recognition in profit or loss of the CSM remaining at the end of the reporting period, ie removing the option of providing qualitative information allowed by IFRS 17:109.
    • (ii) Specific disclosure of the approach to assessing the relative weighting of the benefits provided by insurance coverage and investment-related services or investment return services, as part of the disclosure requirements in IFRS 17:117 related to significant judgements and changes in judgements made in applying IFRS 17.
  • (b) Insurance acquisition cash flows not yet included in the measurement of recognised groups of insurance contracts, by requiring:
    • (i)Reconciliation of the asset created by these cash flows at the beginning and the end of the reporting period and its changes, specifically recognition of any impairment loss or reversals. The aggregation of the information provided in this reconciliation should be consistent with the aggregation an entity uses when applying IFRS 17:98 to the related insurance contracts.
    • (ii) Quantitative disclosure, in appropriate time bands, of the expected inclusion of these acquisition cash flows in the measurement of the related group of insurance contracts. The acquisition cash flows will be included in the measurement of the related group of insurance contracts when those contracts are recognised.

Board decision

The Board decided unanimously to follow the staff recommendation. There was no significant discussion on this agenda paper.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.