Initial Application of IFRS 17 and IFRS 9 — Comparative Information

Background paper (Agenda Paper 2)

The Board's Exposure Draft (ED) Initial Application of IFRS 17 and IFRS 9—Comparative Information (Proposed amendment to IFRS 17) was published in July 2021. The proposed amendment allows an entity to apply a classification overlay when first applying IFRS 17 and IFRS 9 at the same time for the purpose of presenting comparative information about a financial asset, if the comparative information for that financial asset has not been restated for IFRS 9.

The IASB staff received 46 comment letters within the 60-day comment period. In this session, the Board discussed feedback, staff analysis, recommendations and questions relating to the scope, impairment and disclosure of the proposed amendment.

Classification overlay — scope (Agenda Paper 2A)

This paper set out feedback, staff analysis, recommendations, and questions for Board members relating to the scope of the proposed amendment.

Removing the scope limitation relating to whether a financial asset is held in respect of insurance activities

Paragraph C28E(a) of the ED proposed that an entity would not be permitted to apply the classification overlay to financial assets that are held in respect of an activity that is unconnected with contracts within the scope of IFRS 17. For example, financial assets held in respect of banking activities would not be eligible for the classification overlay. This is consistent with a different transition relief in paragraph C29(a) of IFRS 17.

Most respondents suggested the Board remove this scope restriction, which would align the scope of the classification overlay with that of the temporary exemption from IFRS 9 for insurers.

The staff view is that the suggestion from respondents would be an improvement on the amendment proposed in the ED.

Staff recommendations

The staff recommended the Board remove the proposed restriction from applying the classification overlay to a financial asset that is held in respect of an activity that is unconnected with contracts within the scope of IFRS 17.

Board discussion

Board members noted that the removal of the restriction means it is easier for preparers to apply the classification overlay approach. Board members agreed with the staff that removing the restrictions from applying the classification overlay can improve comparability and reduce mismatches between financial assets and insurance contract liabilities in the comparative information. Thus, it would provide more useful information which is consistent with the objectives for this narrow-scope amendment. One Board member noted that there was a lack of user responses in the agenda paper.

All Board members agreed with the staff recommendations.

Expanding the scope to entities that already applied IFRS 9

Paragraph C28A of the ED proposed that an entity that first applies IFRS 17 and IFRS 9 at the same time is permitted to apply the classification overlay. Paragraph C28C of the Exposure Draft goes on to explain that in applying the classification overlay, an entity presents comparative information as if the classification and measurement requirements of IFRS 9—rather than IAS 39—had been applied to the financial asset. The proposed classification overlay would not apply to entities that have already applied IFRS 9 before initial application of IFRS 17.

A few respondents suggested the Board expand the scope of the classification overlay so that it can be applied by insurers that have already applied IFRS 9. Respondents explained that those insurers have the same concerns about accounting mismatches in the comparative period relating to derecognised financial assets as insurers that will first apply IFRS 17 and IFRS 9 at the same time, which resulted in the Board proposing the classification overlay.

The staff are sympathetic to those concerns. They understand that, for example, an entity may have classified a financial asset derecognised in the comparative period as measured at amortised cost applying IFRS 9 previously, but may wish to present those financial assets as at fair value through profit or loss in the comparative information presented on initial application of IFRS 17 to reduce accounting mismatches with comparative information about insurance contracts that has been restated for IFRS 17.

The staff view is that the scope of the classification overlay should be expanded to apply in such cases.

Staff recommendations

The staff recommended the Board expand the proposed scope of the classification overlay to entities that already applied IFRS 9.

Board discussion

Board members generally agreed with the staff recommendation. One Board member noted that the Board had been very restrictive previously when allowing changes on measurement by using the fair value through profit or loss (FVTPL) option given the FVTPL designation is a one-off decision to avoid the risk of cherry-picking. Entities will be expecting both a mismatch and an accounting policy choice here. Therefore, it seems like there is no designation requirement anymore. However, the Board member agreed to have designation at the initial application of IFRS 17 and bring it forward to comparatives. The staff explained this scope expansion is designed to help entities that already applied IFRS 9 to avoid an accounting mismatch when presenting their comparatives, it will not affect any existing requirements under IFRS 9.

One Board member noted that the scope expansion treated entities equally regardless of whether they have already applied IFRS 9 or will adopt IFRS 9 later.

One Board member highlighted that the final draft wording needs to be precise so that the scope extension for entities that have already applied IFRS 9 are only for the items listed under IFRS 17:C29 to avoid an unintended scope extension.

All Board members agreed with the staff recommendations.

Classification overlay — other matters (Agenda Paper 2B)

Staff recommendations

The staff recommended the Board make no substantial changes to the classification overlay proposed in the Exposure Draft relating to impairment of financial assets or disclosures. However, the staff has highlighted some potential drafting improvements that they will consider when preparing the final amendment.

Board Discussion

The Board discussed the impairment issue first: Board members agreed to have a clearer statement in the final amendment, for example, the overlay approach is not only for classification but also for measurement of the gross amount. For impairment, the Standard needs to be clear on what is permitted and what is required. One Board member noted that the expectation was to apply either IAS 39 or IFRS 9 impairment and it was not intended to create a new impairment model for IFRS 17.

All Board members agreed with the staff recommendations.

The Board then discussed the two disclosure questions in the agenda paper:  Board members noted that only few assets needed to be changed under the comparatives when applying the ‘classification overlay’, thus they did not think it was necessary to add additional disclosure requirements. They also agreed that there was less incentive for the preparers to disclose information in relation to the comparative period and it may incur more costs than benefits.

Some Board members suggested to add a disclosure requirement in relation to which impairment method was applied in the comparatives. Some Board members noted that the general disclosure requirements in IAS 1 and IFRS 7 may already capture this and would therefore not expect additional disclosure requirements in IFRS 17.

One Board member noted that given the IFRS 9 transition and IFRS 7 disclosure requirements should be applied by all entities at the date of initial application, there was no need to add additional disclosures about the initial application of IFRS 9.

Based on the discussion, the staff added ‘requirement to disclose what impairment method used for the assets overlay’ to the vote. All Board members voted in favour of this.

Finalising the amendment (Agenda Paper 2C)

This paper asked Board members whether they are satisfied that the Board has complied with the applicable due process steps and should begin the balloting process to issue the amendment to IFRS 17 and whether they intend to dissent from the issuance of the amendment to IFRS 17.

Staff recommendations

The staff recommended that the Board begin the balloting process and issue the amendment to IFRS 17 before the end of 2021.

Board Discussion

One Board member noted that the staff did not receive any comment letters from users of financial statements, and whether, for completeness, the staff should reach out to them again to get their views. However, other Board members did not want to wait to conclude the project. The Board member asked whether the staff could examine whether there was a way to do this smartly without delaying the project.

All Board agreed to begin the balloting process and no members intended to dissent from the amendment to IFRS 17.