Background
As it has become obvious that the effective date of IFRS 17 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 argued that:
- The different effective dates would 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 would be 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 would bear the potential of significantly increased costs and efforts (for preparers and for users).
The IASB has acknowledged these concerns and is therefore amending IFRS 4 Insurance Contracts to address the concerns expressed about the different effective dates of IFRS 9 and IFRS 17.
Changes
The amendments in Applying IFRS 9 'Financial Instruments' with IFRS 4 'Insurance Contracts' (Amendments to IFRS 4) provide two options for entities that issue insurance contracts within the scope of IFRS 4:
- an option that permits 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 is optional and an entity is permitted to stop applying them before the new insurance contracts standard is applied.
Overlay approach. The amendments that form the overlay approach 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.
Deferral approach. Under the amendments that make up the deferral approach, an entity is 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 determines 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. An insurer’s activities are predominantly connected with insurance if (a) the carrying amount of its liabilities arising from contracts within the scope of IFRS 4 is significant compared to the total carrying amount of all its liabilities and (b) the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities is either greater than 90 per cent or less than or equal to 90 per cent but greater than 80 per cent, and the insurer does not engage in a significant activity unconnected with insurance. In connection with the deferral approach there is also a temporary exemption from specific requirements in IAS 28 regarding uniform accounting policies when using the equity method.
Dissenting opinion
One Board member voted against the publication of the amendments because this Board member does not agree with the temporary exemption from applying IFRS 9. This Board member argues that the deferral approach will reduce comparability, including between entities that issue insurance contracts. The Board member acknowledges the concerns voiced but is of the opinion that the overlay approach offers enough relief and makes a temporary exemption from applying IFRS 9 unnecessary.
Effective date and disclosures
An entity applies the overlay approach retrospectively to qualifying financial assets when it first applies IFRS 9. 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 applies the deferral approach for annual periods beginning on or after 1 January 2018. Predominance is assessed at the reporting entity level at the annual reporting date that immediately precedes 1 April 2016. Application of the deferral approach needs to be disclosed together with information that enables users of financial statements to understand how the insurer qualified for the temporary exemption and to compare insurers applying the temporary exemption with entities applying IFRS 9. The deferral can only be made use of for the three years following 1 January 2018. Predominance is only reassessed if there is a change in the entity’s activities.
Additional information
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In connection with the amendments the IASB has also published a proposed Update 2 to the IFRS Taxonomy 2016 containing taxonomy elements for the amendments. More information on the proposed taxonomy update is available on the IASB website. Comments are requested by 15 November 2016.