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IASB proposes amendments to address concerns about the different effective dates of IFRS 9 and the new insurance contracts standard

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09 Dec 2015

The International Accounting Standards Board (IASB) has published an exposure draft (ED/2015/11) with proposed amendments to IFRS 4 'Insurance Contracts' that are intended to address concerns about the different effective dates of IFRS 9 'Financial Instruments' and the forthcoming new insurance contracts standard. Comments are requested by 8 February 2016.

 

Background

As it has become obvious that the effective date of the forthcoming IFRS on insurance contracts can no longer be aligned with the effective date of IFRS 9 Financial Instruments there have been calls for the IASB to delay application of IFRS 9 for insurance activities and align the effective date of IFRS 9 for those activities with the effective date of the new insurance contracts standard. Proponents of a deferral argue that:

  • The different effective dates will lead to accounting mismatches and volatility in profit or loss that users of financial statements might find difficult to understand.
  • Making decisions about applying the new classification and measurement requirements in IFRS 9 before the new insurance contracts standard is finalised is difficult as the decisions might differ from those companies would have made had all details of the new standard been known.
  • Having to cope with two major accounting changes in a relatively short time bears the potential of significantly increased costs and efforts (for preparers and for users).

The IASB acknowledges these concerns and therefore proposes amending IFRS 4 Insurance Contracts to address the concerns expressed about the different effective dates of IFRS 9 and the new insurance contracts standard.

 

Suggested changes

The amendments proposed in ED/2015/11 Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Proposed amendments to IFRS 4) are intended to provide two options for entities that issue insurance contracts within the scope of IFRS 4:

  • an option that would permit entities to reclassify, from profit or loss to other comprehensive income, some of the income or expenses arising from designated financial assets; this is the so-called overlay approach;
  • an optional temporary exemption from applying IFRS 9 for entities whose predominant activity is issuing contracts within the scope of IFRS 4; this is the so-called deferral approach.

The application of both approaches would be optional and an entity would be permitted to stop applying them before the new insurance contracts standard is applied.

Overlay approach. The amendments that form the overlay approach would permit an entity to exclude from profit or loss and recognise in other comprehensive income the difference between the amounts that would be recognised in profit or loss in accordance with IFRS 9 and the amounts recognised in profit or loss in accordance with IAS 39 Financial Instruments: Recognition and Measurement provided that the entity issues contracts accounted for under IFRS 4, applies IFRS 9 in conjunction with IFRS 4, and classifies financial assets as fair value through profit or loss in accordance with IFRS 9 when those assets were previously classified at amortised cost or as available-for-sale in accordance with IAS 39. Application of the overlay approach requires disclosure of sufficient information to enable users of financial statements to understand how the amount reclassified in the reporting period is calculated and the effect of that reclassification on the financial statements. An entity would apply the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9.

Deferral approach. Under the amendments that make up the deferral approach, an entity would be permitted to apply IAS 39 rather than IFRS 9 for annual reporting periods beginning before 1 January 2021 if it has not previously applied any version of IFRS 9 and if its predominant activity is issuing contracts within the scope of IFRS 4. An entity would determine whether its predominant activity is issuing contracts within the scope of IFRS 4 by comparing the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 with the total carrying amount of its liabilities. The IASB does not specify a particular quantitative threshold for predominance but indicates in the Basis for Conclusions that predominance is intended to be a high threshold and that 75% liabilities from insurance activities would not qualify as high. The IASB also maintains that an entity would need to assess predominance at the reporting entity level. Lastly, the IASB states that an entity that applies the deferral approach but falls beneath the predominance threshold in a subsequent reporting period would be required to apply IFRS 9 from the beginning of the next annual reporting period. An entity would apply the deferral approach for annual periods beginning on or after 1 January 2018. Application of the deferral approach needs to be disclosed together with the reasons for applying it. The deferral can only be made use of for the three years following 1 January 2018.

 

Alternative views

Three Board member voted against the publication of the ED because they do not agree with the proposal to provide entities with predominant insurance activity with a temporary exemption from applying IFRS 9. These Board members argue that the deferral approach will reduce comparability, including between entities that issue insurance contracts. They acknowledge the concerns voiced but are of the opinion that the overlay approach offers enough relief and makes a temporary exemption from applying IFRS 9 unnecessary. They are also concerned that delays might occur in the insurance contracts project that would exceed the three year span the deferral approach is intended to be limited to.

 

Next steps

ED/2015/11 Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Proposed amendments to IFRS 4) is only open for comment for 60 days. The IASB notes that the Due Process Handbook permits a comment period shorter than the standard minimum period of 120 days if the matter is narrow in scope and urgent, which the IASB believes is the case with these amendments. The IASB will consider the comments that it receives on the proposals and intends to complete its redeliberations as soon as possible in 2016.

 

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