Background

The Committee received a submission about the application of IFRS 17 and IAS 21 to a group of insurance contracts with foreign currency cash flows. The submission asked (a) whether an entity considers currency exchange rate risk when applying IFRS 17 to identify portfolios of insurance contracts; and (b) how an entity applies IAS 21 in conjunction with IFRS 17 in measuring a multi-currency group of insurance contracts.

Staff analysis

From the outreach performed, most respondents said it is common for groups of insurance contracts to have foreign currency cash flows and it would be complex if multiple underlying insurance contracts are denominated in many currencies.  

For the first question asked, most respondents said there may be circumstances in which currency risk is considered to be a key risk in an insurance contract, and thus it could influence an entity’s assessment of whether contracts are subject to similar risks. The staff believed it was appropriate to consider all risks, including currency risk, when identifying portfolios of insurance contracts because the portfolio requirements in IFRS 17:14 refer to "similar risks" without specifying the types of risks to consider. Moreover, an entity could identify portfolios of contracts that include contracts subject to different currency risk because ‘similar’ does not mean ‘identical’. What an entity considers to be ‘similar risks’ depends on the nature and extent of the risks in the entity’s contracts. In assessing whether contracts are subject to ‘similar risks’, the staff recommended considering the IASB's rationale for requiring an entity to identify portfolios of insurance contracts. IFRS 17:BC123(a) explains that the IASB did not want entities to depict one type of contract as cross-subsidised by another type of contract, therefore IFRS 17:BC124 sets out requirements that an entity generally groups contracts together only if the contracts have future cash flows that the entity expects will respond similarly in amount and timing to changes in key assumptions.

In respect to the second question, respondents said that there are generally two approaches (the group of insurance contracts (including the contractual service margin(CSM)) is considered to be denominated in either a single currency or multiple currencies, reflecting the currencies of the fulfilment cash flows) to choose depending on their circumstances. The staff analysed that an entity first applies all the measurement requirements in IFRS 17:30 to the group of contracts and recognises and measures one CSM for the group of insurance contracts. Secondly, an entity treats the group as a monetary item and at each reporting date translates the carrying amount at the closing rate (or rates) applying IAS 21:21-24. In view of the fact that both IFRS 17 and IAS 21 include no explicit requirements on how to determine the currency denomination of transactions or items that generate cash flows in more than one currency, the entity uses its judgement in developing and applying an accounting policy to apply one of the approaches described by the respondents based on its specific circumstances and the terms of the contracts in the group applying IAS 8. In doing so, the staff noted that the entity cannot simply deem the CSM for the group to be denominated in the entity’s functional currency because if would in effect fail to treat the CSM as a monetary item.

In the light of its analysis, the Committee considered whether to add to the work plan a standard-setting project on the matter submitted. The staff observed that it has not obtained evidence that such a project would be sufficiently narrow in scope or such matter could be addressed in an efficient manner.

Staff recommendation

The staff recommend not adding a standard-setting project to the work plan but to publish a tentative agenda decision that sets out the applicable requirements in IFRS 17 and IAS 21 on the matter of how to account for the foreign currency aspects of multi-currency groups of contracts.

Committee discussion

Committee members generally agreed with the staff analysis that currency risk should be considered when assessing ‘similar risks’ for the purpose of identifying portfolios of insurance contracts. However, a number of Committee members had concerns with the example in the staff paper illustrating US dollar, euro and pound sterling as "similar risks". They asked how the conclusion that the currency risk is "similar" is made, whether such assessment is entity-specific or based on objective evidence. One Committee member was not convinced that the US dollar, euro and pound sterling in the example are considered "similar" given that the future cash flows of these currencies could respond differently. The staff explained that "similar risks" in the context of IFRS 17 depends on the terms and nature of the insurance contracts. Some Committee members considered these currencies could be considered similar because currency risk is generally not the main risk of insurance contracts, they may not affect the performance of the contract much even though they may vary differently. Having said that, these Committee members suggested that the tentative agenda decision should not go beyond making the assessment that these currencies have "similar risk" but to ask the entity to do the analysis in order to make the assessment.

Regarding the second question, only one Committee member was not persuaded that Approach 2 is an acceptable one. He did not agree that CSM is a monetary item because it has no cash flows and the contract should not be split in its measurement given the unit of account is the grouped contracts. The remainder of the Committee members generally agreed that there is an accounting policy choice in measuring a multi-currency group of insurance contracts and entities should apply judgement to determine which approach to use to similar groups of contracts. Their main discussion is that in Approach 2, it is not clear whether a single CSM determined at initial recognition is used in the measurement and whether reassessment is required in measuring the contracts. The staff explained that the agenda decision does mean one single CSM is applied and no reassessment should be made, the splitting of the fulfilment cash flows is purely to translate the respective foreign currencies into the function currency at closing rate. The staff will make this clear in the tentative agenda decision. Moreover, another Committee member questioned whether the foreign exchange loss would turn the group of contracts onerous. The staff responded that only when an entity tracks each loss component of risk separately, it may identify contracts to be onerous due to foreign exchange risk. However, an entity does not have to track each component of non-financial risk to identify whether the group of contracts is onerous under IFRS 17. To make this clearer, a description of how a group of contracts is assessed to be onerous will be added to the tentative agenda decision.

Committee decision

All Committee members agreed with the staff's analysis on the first question and 13 out of 14 Committee members agreed with the staff's analysis on the second question. Moreover, the Committee decided, by a unanimous vote, not to add the matter to its standard-setting agenda but to publish a tentati agenda decision.