Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges, among them the issues identified in the EFRAG letter sent to the IASB last month.

There were four papers for the meeting: A summary of the TRG meeting held in September, the TRG submission log, the criteria the staff of the IASB has developed for the Board to apply in assessing whether a concern warrants considering an amendment, and identified concerns and implementation challenges. All papers for this session are available on the IASB website (please scroll down).

The discussion focused on agenda paper 2C for the meeting revealing the criteria the staff of the IASB has developed for the Board to apply in assessing whether a concern warrants considering an amendment:

1. the amendment would not result in significant loss of useful information relative to that which would be provided by IFRS 17 for users of financial statements and
2. the amendment would not unduly disrupt implementation processes that are already under way or risk undue delays in the effective date of a standard that is needed to address many inadequacies in the existing wide range of insurance accounting practices.

In the paper, the staff also noted that even if the Board agrees that any potential amendment to IFRS 17 meets the criteria, it does not mean that all amendments meeting these criteria are justified. The staff also stressed that any changes would affect the effective date.

The Board made the following comments:

• amendments need to be necessary, not just fulfil the criteria;
• what's missing in the criteria is that changes should not compromise the criteria of IFRS 17;
• the Board should deal with implementation issues only, not just anything that is connected with IFRS 17;
• changes should be narrow in scope and should be able to be dealt with efficiently;
• changes to IFRS 17, a final standard, would impact those who have already begun implementing it;
• pushback must be expected;
• 25 issues is many;
• picking up some issues but not all will make some people happy and some very unhappy;
• any changes would need to go through the full due process;
• establishing a TRG meant the IASB is open to hearing about problems and to deal with them;
• the IASB needs to consider interaction with IFRS 9;
• do the issues identified relate to material new information or are they issues the Board has considered before?;
• investors are waiting for the new standard, there needs to be a high hurdle for changing it;
• benefits of changes need to exceed the costs;
• are there items on the list for which the efforts or costs are underestimated?;
• could practical expedients help?;
• the IASB needs to avoid being pulled into something that seems to be unavoidable;
• costs and efforts of the whole package of changes must be considered;
• exceptions increase the complexity;
• it must be prevented that the IASB having this discussion in the first place will lead to entities downing their tools;
• how did the items get onto the list?;
• should new unexpected costs be a criterion?;
• a lot of work went into the standard;
• a lot of feedback was gathered;
• a lot of people are waiting for the standard to become effective.

Chairman Hans Hoogervorst concluded the discussion by stating that he had read the papers for the discussion with a heavy heart. He just hoped that the standard would get into place before the next financial crisis - as the markets were very nervous and there was much too much debt in the market. He therefore concluded that changes to IFRS 17 should be fine-tuning only and legitimised by decreasing costs. He also added that the whole package of issues should be looked at and that 25 issues were too many.

The Board voted unanimously for the criteria developed by the staff.

Another focus of the meeting was agenda paper 2D including some background information and providing for each identified concern or implementation challenge:

• an overview of the IFRS 17 requirements;
• a summary of the Board’s rationale for setting those requirements;
• an overview of the concern or implementation challenge expressed; and
• staff preliminary thoughts.

Only some of the individual concerns and challenges were discussed, none in detail, however, there was significant discussion around the issues related to the effective date of IFRS 17. It was noted by IASB Board individual members:

• that a lot of users are waiting for IFRS 17;
• that some preparers are calling for more time/don't want to be rushed/want to ensure a quality implementation;
• that it is important to keep track of the different reasons for calling for a deferral;
• that the effect of having no comparatives would need to be considered;
• that the interaction with IFRS 9 would need to be considered; and
• that a two-tier model (listed and unlisted companies) might help/ would take little pressure off the market.

The Board will be asked to consider at a future meeting whether any of the concerns and implementation challenges indicate a need for standard-setting to amend the requirements of IFRS 17.

The IASB itself has relaesed a short press release commenting on the session.

The AAOIFI is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Sharia'a standards for Islamic financial institutions and the industry. It was founded in 1991 and has so far issued a total of 100 standards.

The IFSB, which is based in Kuala Lumpur, started operations in March 2003. It serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance. Since its inception, the IFSB has issued 27 standards, guiding principles and a technical note for the Islamic financial services industry.

Areas of cooperation under the MoU between the IFSB and AAOIFI include:

• Development and revision of prudential, Sharia'a, accounting and governance standards on areas of mutual interest;
• Promotion of the implementation of prudential, Sharia'a, accounting and governance standards to facilitate the development of the Islamic financial services industry; and
• Enhancement of awareness through knowledge sharing and organisation of executive programmes, workshops, conferences, and seminars.

Please click to access the press release published on the IFSB website.

There are two seperate surveys: The users' survey will take approximately 30 minutes and the prepares' survey between 30-45 minutes to complete. EFRAG invites participants to complete the appropriate survey by 30 November 2018. Please click to access the surveys through the press release on the EFRAG website.

Background

The post-implementation review of IFRS 3 Business Combinations revealed that entities have difficulties when determining whether they have acquired a business or a group of assets. As the accounting requirements for goodwill, acquisition costs and deferred tax differ on the acquisition of a business and on the acquisition of a group of assets, the IASB decided to issue narrow scope amendments aimed at resolving the difficulties that arise when an entity is determining whether it has acquired a business or a group of assets.

In June 2016, the IASB published ED/2016/1 Definition of a Business and Accounting for Previously Held Interests (Proposed amendments to IFRS 3 and IFRS 11), combining two of its implementation projects at that time. The proposed amendments regarding the accounting for previously held interests were finalised as part of the annual improvements 2015-2017 on 12 December 2017. The proposed amendments regarding the definition of a business are being finalised today.

Changes

The amendments in Definition of a Business (Amendments to IFRS 3) are changes to Appendix A Defined terms, the application guidance, and the illustrative examples of IFRS 3 only. They:

• clarify that to be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs;
• narrow the definitions of a business and of outputs by focusing on goods and services provided to customers and by removing the reference to an ability to reduce costs;
• add guidance and illustrative examples to help entities assess whether a substantive process has been acquired;
• remove the assessment of whether market participants are capable of replacing any missing inputs or processes and continuing to produce outputs; and
• add an optional concentration test that permits a simplified assessment of whether an acquired set of activities and assets is not a business.

Interaction with the FASB

The amendments note that IFRS 3 is the result of a joint project between the IASB and the FASB and the business combinations requirements under IFRSs and US GAAP are substantially converged. However, even though the FASB (that had received similar feedback) and the IASB have worked together to respond to problems with the definition of a business, the IASB amendments to the application guidance of IFRS 3 are different from the amendments issued by the FASB in 2017. Nevertheless, the IASB expects that the amendments in conjunction with the FASB amendments will lead to more consistency in applying the definition of a business between entities applying IFRSs and entities applying US GAAP.

Effective date and transition requirements

The amendments are effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020 and to asset acquisitions that occur on or after the beginning of that period. Earlier application is permitted.

Additional information

Please click for:

• IASB press release (link to IASB website)
• IFRS in Focus newsletter
• Our IAS Plus project page on IFRS 3 — Definition of a business
• Updated EFRAG endorsement status report

In September 2018, EFRAG agreed on a letter to the IASB regarding IFRS 17 to bring concerns of European constituents regarding the standard to the IASB's attention. While EFRAG is waiting for the IASB to consider these (and other) concerns, the endorsement process for IFRS 17 is temporarily put on hold. The IASB will discuss IFRS 17 concerns and implementation challenges at its meeting next week but no decisions are expected as yet.

The ESAs note the delay in the endorsement process with concern. Their letter states:

While, at this stage, we do not express any detailed technical views on IFRS 17, we reiterate the need to continue to progress and to finalise the analysis of IFRS 17 in a timely manner against the background of the effective date of IFRS 17 of 1 January 2021.

Similarly, in a speech given in Madrid today, the Chair of the European Securities and Markets Authority (ESMA), which is one of the ESAs, also commented on IFRS 17. He said:

[W]hile we are still analysing its technical details, one thing that can already be affirmed with certainty is that IFRS 17 will improve comparability and transparency of financial information on insurance contracts when compared to the current situation. [...] Therefore, while it is important to exercise caution in assessing the changes introduced by IFRS 17, I think it is necessary to avoid any further delays in reaching a common set of accounting standards for insurance contracts. [...W]e are quite concerned by the delay that we are observing in the endorsement process of IFRS 17 in the EU.

And while the European Insurance and Occupational Pensions Authority (EIOPA), also one of the ESAs, does not explicitly refer to the endorsement process, it notes in its analysis of the benefits of IFRS 17 that has just now also become available:

EIOPA found that the expectedly increased transparency and comparability of insurers' financial statements through IFRS 17, providing better insights into insurers' business models, have the potential to strengthen financial stability in the European Economic Area (EEA). Therefore, EIOPA regards the implementation of IFRS 17 as beneficial for the European public good. [...] The introduction of IFRS 17 is a long overdue and positive shift of paradigm compared to IFRS 17's predecessor IFRS 4 Insurance Contracts.

Please click to access the the quoted documents:

• Letter to EFRAG (ESAs website)
• Speech by the ESMA Chair (ESMA website)
• EIOPA anaylsis of IFRS 17 (EIOPA website)

Mr Liikanen noted that financial reporting works best when standards and practices across jurisdictions are the same to maintain consistency and that the use of IFRS Standards have helped achieve this. In addition, he stated that his priorities for the Trustees are to look at core functions and strategies.

For more information, see the interview on the IASB’s website.

The DPOC members discussed the following topics

• Introduction and actions from DPOC meeting held on 5 June 2018
• Technical activities: Key issues and update
• Review of the post-implementation review of IFRS 13
• Consultative groups — annual review and DPOC engagement
• Reporting protocol — annual general report
• Education material — review of due process
• Due Process Handbook review
  • Proposals for improvements
    • Agenda decisions: Supporting consistent application
    • Adding projects to the Board’s work plan
    • Effects analysis
    • Taxonomy
    • Anonymous complaints about due process
  • Outline of timetable and next steps
• Correspondence: update
• Summary

The recordings are available on the IASB's website.

The letter stresses the support of the industry for IFRS 17 as a "high-quality standard for insurance contracts which improves insurers’ financial reporting" but notes that preparatory work has confirmed that "a number of important issues need to be resolved in order to ensure the quality and operational practicability of the new standard". In addition, the insurers mention operational constraints ontheir ability to successfully implement IFRS 17 on the current timelines. The letter argues:

As a result, we strongly believe a 2-year delay in the effective date of the standard is required. This lead time is essential both to allow for the necessary improvements to the standard and to allow adequate time for the wide range of companies required to apply the standard and meet its significant implementation challenges.

The letter promises that a delay would not result in insurers stopping or slowing their implementation projects.

Please click to access the letter on the website of Insurance Europe, one of the signatories of the letter.

The Wednesday sessions start with the Primary Financial Statements project. The focus is on the labels the Board will use to describe subtotals. The staff are recommending that the labels be operating profit or loss; operating profit or loss and share of profit or loss of integral associates and joint ventures; and profit or loss before financing and income tax (with entities being prohibited from using the term ‘EBIT’ for this subtotal).

On Implementation, the IASB will consider a recommendation by the IFRS Interpretations Committee that the IASB amend IAS 12 Income Taxes in relation to the initial recognition of a lease, by a lessee, and decommissioning obligations. 

The staff will give an oral update on the Management Commentary project.

The staff will present a proposal to revise the Preface to International Financial Reporting Standards, removing redundant material on the structure of the IASB and its due process requirements.

For the Disclosure Initiative, the focus is on accounting policies. The staff recommend that the Board clarify that not all accounting policies relating to material transactions, other events or conditions are material. They also recommend that the Board develop guidance and examples for inclusion in the Materiality Practice Statement to help entities apply effective judgement when deciding whether accounting policies are material.

The Board will discuss IFRS 17 Insurance Contracts, to help it determine how it should respond to concerns that have been brought to its attention regarding this Standard (the papers include a description of 25 identified concerns). The staff have developed criteria for the Board to apply in assessing whether, in each case, it should propose an amendment to IFRS 17. We do not expect the Board to make any decisions about specific issues at this meeting.

On Thursday the staff will give an update on the Rate-regulated Activities project.

The meeting concludes with a session on Goodwill and Impairment. The staff present their proposed outline for a Discussion Paper. The main sections would focus on improving disclosures, simplifying the impairment test, and simplifying the accounting for goodwill. The staff are asking the Board to reconsider its earlier decisions not to pursue some ideas around improvements to the impairment test. The Board has not indicated when it expects to publish the DP.

More in­for­ma­tion

Our pre-meet­ing summaries are available on our October meeting note page and will be sup­ple­mented with our popular meeting notes after the meeting.

Since IFRS 17 was issued in May 2017, the Board has been monitoring the implementation and has learned about concerns and implementation challenges, among them the issues identified in the EFRAG letter sent to the IASB last month. The Board had previously indicated that it would consider whether additional action is needed to address matters arising during implementation. The upcoming meeting on 24 October will be a first step in this assessment process.

Agenda paper 2C for the meeting reveals the criteria the staff of the IASB has developed for the Board to apply in assessing whether a concern warrants considering an amendment:

1. the amendment would not result in significant loss of useful information relative to that which would be provided by IFRS 17 for users of financial statements and
2. the amendment would not unduly disrupt implementation processes that are already under way or risk undue delays in the effective date of a standard that is needed to address many inadequacies in the existing wide range of insurance accounting practices.

The staff also notes that even if the Board agrees that any potential amendment to IFRS 17 meets the criteria, it does not mean that all amendments meeting these criteria are justified.

Agenda paper 2D for the meeting includes some background information and provides for each identified concern or implementation challenge:

• an overview of the IFRS 17 requirements;
• a summary of the Board’s rationale for setting those requirements;
• an overview of the concern or implementation challenge expressed; and
• staff preliminary thoughts.

The paper notes 25 identified concerns that are listed in paragraph 12 in a table offering an overview and referencing the subsequent paragraphs where the concern is dicussed in detail.

The Board will be asked to consider at a future meeting whether any of the concerns and implementation challenges indicate a need for standard-setting to amend the requirements of IFRS 17. There are no decisions expected at this meeting.

The papers for this session (currently scheduled for 15:15-17:45 on 24 October) are available on the IASB website (please scroll down). In addition to the two papers pointed out above, they also include a cover note, a summary of the TRG meeting held in September, and the TRG submission log.